Podcast appearances and mentions of michael all

Play Episode Listen Later Jan 28, 2023 28:14

In this episode, we welcome House Canary's Director of Research, Brandon Lwowski to look at what has been happening in the real estate market over the last years and where we are headed as an industry. We discuss the health of the real estate market, the residual effects of the response to COVID-19, and the main challenges facing investors today. Brandon Lwowski built his career after studying Computer Science Mathematics at The University of Texas at San Antonio. In his role at HouseCanary as Director of Research, Brandon distills what is happening in the real estate market through data analytics and machine learning to help investors make more informed decisions about their portfolios. Links: https://www.housecanary.com/ https://www.linkedin.com/in/brandon-lwowski/ --- Transcript Before we get into the episode, here's a quick disclaimer about our content. The SFR show is for informational purposes only, and is not intended as investment advice. The views, opinions, and strategies of the hosts and the guests are their own and should not be considered as guidance, from Roofstock. Make sure to run your own numbers, make your own independent decisions and seek investment advice from licensed professionals. Michael: Hey, everyone, welcome to an episode of the SFR show, the place where you get all of your up to date SFR investing information. I'm Michael Albaum, and today my guest is Brandon Lwowski, the director of Research over HouseCanary and he's gonna be talking to us about all of the things that have been going on in the market over the last several years and months, and how we can use that information going forward. So let's get into it. Hey, Brandon, what's going on? Thanks so much for taking the time to come jump in chat with me today. Appreciate it, man. Brandon: No, of course, it's good to be here to get an opportunity to discuss the real estate market for sure. Michael: Yeah, I'm super excited. So you're the director of Research at HouseCanary. Give us all just a quick little bit of insight background on who you are and what house canary is and what they do as a company. Brandon: Yeah, definitely. So HouseCanary, you know, it's basically a national brokerage and so it's really known for its real estate valuation, technology and accuracy. This company has been around since 2013. It was founded by Jeremy Sicklick, our CEO and our Chief of Research, Chris Stroud, kind of off of the 2008 housing crisis, they did decide to form this company to kind of help speed up the transactions and speed up and really gain knowledge and just competence in the real estate market through using analytics machine learning to provide 100 and 14 million valuations on properties as well as 91 million rental valuations. So if you think of how scary it's built around the analytics and valuations of the United States real estate market. Michael: It was at $114 million valuations that you said since it since inception. Brandon: No, that's monthly, we produce 114 million property valuations. Of course, the 114 million is a subset of you know, every property in the United States and that repeated monthly, but we train this very complex machine learning model AI model to produce 114 million property valuations. Michael: That's incredible. Well, I want to come back to HouseCanary as a company here in a minute. But I want to first start by asking you, Brandon, because it is so analytics and data driven, what is it that HouseCanary as a company and you as an as the director of research are seeing in the numbers in the data with regard to just where we are in the market, there's so much chatter about market cycles and ups and downs and bubbles, give us a little bit of insight to what are the numbers and facts supporting where we are right now, as we're recording this brand new into the new year 2023. Brandon: I think kind of the one of the biggest headlines to kind of drive home right now, especially in the market, we have this unique combination of these elevated interest rates and you know, the slow buying season that we typically see during the winter months, this has really impacted across the board, our new inventory coming into the market, our new listings, listings going under contract, all of these metrics that we typically look at to understand the health of the market and the health of the real estate market, have really had significant declines year on a year over year basis, that's across the board inventory listings under contract, the Feds kind of you know, their fourth straight 75 basis point interest rate increase, you know, as the thing is, the fourth month straight or the fourth, fourth one straight, has really had that negative impact on net inventory. But this is just providing more evidence that you know, supply of homes is still squeezed and it's remaining negative over time, we've kind of seen this trend since August, right where our supply of affordable housing and actually all housing in the market has really continued to drop and this is basically you know, the biggest driving factor here is that interest rates shot really driving down these new listings volumes to like a multiyear low since pre you know, I don't use the word pre pandemic because you know, we're still in the pandemic, but that pre pandemic peaks we'll call them we're seeing you know, all its multi-year lows in terms of new listings, everything going on the real estate market. The biggest picture here is even as these interest rates come up, our supply just remains extremely negative and still going in a downward trajectory. Michael: And when you say downward trajectory is that From 12 months prior, or is that from the prior month? Brandon: We're looking at a year a year basis right now. If you think about the month over month basis, we are still seeing declines. But when we're talking about these multi year lows in terms of net new listings, on the purchase side of the market, we've reached those multi year lows. I think, you know, the reason why this supply crisis is also happening right now is, in this current real estate environment, it's really difficult to convert homeowners and current renters and convert them into future homebuyers, right. In this elevated interest, interest rate market, it just doesn't make sense financially for a lot of people to enter the market, you think of this large group of, of homebuyers that purchase homes at record low interest rates, they refinanced during the peak of a call it the peak of the refinance, boom, that happened during the pandemic and for them to reenter the market, it just doesn't make financial sense for them. So in order to move out of their current home and into a new loan, they're going to be paying a higher premium for the same quality of home. So they're available availability to spend money has definitely decreased and I really don't see this inventory shortage, kind of relieving itself or beginning to increase well into, you know, the first quarter, second half or first half of 2023, the supply just remains super squeezed. Michael: Okay and so that, like the supply aspect is, I'm guessing one ingredient in the recipe, so to speak, what are some of the other things that you're looking at, and that you're seeing, to give you an indicator of where we're headed and where we are currently. Brandon: Right. So I think so the supply is, has been squeezed, I think since COVID, there's been a really tight squeeze on the flat supply side of the market. But with those low interest rates that were happening, I mean, 1- 2% interest rates, people were getting their home loans that the demand for property shot up, which is why we really saw that two, three years of just record breaking price growth and the real estate market. Now we're looking at the demand side, and we're actually in the seventh consecutive month of double digit declines in on a year over year basis, we're looking at the listings that are coming under contract in the market. So if you look at inventory as a supply of new listings coming in, if we look at listings of those listings, and the existing market, this existing supply, existing supply, listings under contract is still seven consecutive months of double digit declines since November, are all of our data right now, it's kind of up to that first week of December 2, so we kind of think of it as, as of November. This is this kind of is the driving force behind this is, you know, we've never seen this kind of seventh consecutive month of double digit. So it's kind of driving a lot of fear into homebuyers and home owners and the way we kind of know that this is not normal, it's kind of beyond the typical seasonality we'd expect during the cold winter months to have seven consecutive months, this kind of uncertainty in the market around interest rates, economic downturn, the inflation, they just continue to force homeowners and would be buyers, you know, to play the waiting game, they're, they're gonna sit in the sidelines, they're gonna stay away from the market and so they're a little more competent in in where this kind of roller coaster is going. Michael: As I'm thinking about such a visual thinker. I'm thinking about this as almost like a race to the bottom in a sense of like supply versus demand once because it sounds like they're almost moving in lockstep negatively, we were having a reduction in supply, but we also have a reduction in demand and once right is that is that the right way to think about it? Brandon: The demand has definitely began to decrease or is decreasing at a faster rate than supply because supply has been squeezed since the pandemic whenever the shutdowns happened. People just stop selling houses. They stopped listing their home so the supply side of the market has been squeezed since the shutdown the pandemic. The demand side due to the interest rate hikes the economic uncertainty, that's where we're really seeing the decrease on the supply side where the decreases are coming from. So even though you know supply is always been net always been tight. We've been tight recently in recent years. A lot of the continued decrease on supply side is actually coming from net new listings so people aren't putting listings on the market right now. For the reason that we discussed earlier. It's hard to get homeowners back into the game. They're actually down around 25% on a year over year basis, in terms of like how many new listings are coming into the market, but even a bigger piece here is on the supply side is our removals of listings are up 65% on a year over year basis. So houses that were listed last month six are being removed from the market further impacting supply, while supply has been remained squeezed like very, very tight supply of properties over the years, there still is a decrease in net new listings, and also an increase in removal. So in that supply is being affected. But when it's so squeezed already, that that impact in the market will not be as significant as the impact of a decreasing demand side of the market. Michael: Yeah and that makes total sense and so what are you seeing with regard to sale, as opposed to sale of percent of this price and then also days on market? Brandon: Yeah. So I think some other key indicators, the market, you kind of just discussed, you know, we have days on market, I think price lists ratio is important, I think, the median price, right, the time series of how is price behaving in this environment, all important and understanding kind of the overall health of the market and I kinda like to go with the big one first, in my opinion, which is the median price, right? Where is the market going? I kind of macro at a national scale. The, if you look at the year over year basis, median price of all single family listings, right, so single family dwellings, that those are actually up 10%, on list prices, and actually up 2% in terms of actual close prices. So even though we're seeing the storyline of these prices really starting to decline and kind of freefall, we're still seeing as a year over year basis, because we hit such a huge peak in the middle of 2022. We're still up year over year, by those two percentage I meant mentioned. On a month over month basis that compared to last month, we are slightly down, but it's very, very small. We're down around one and a half percent on listings and down and less than half a percent on close prices. So we see a lot of the storylines and the headlines across the news, that these prices are falling drastically. We're in a deep decline. The roller coaster rails are off and we're down to 2008 again, but just looking at the data alone without any sort of human interjection or opinions. I'm not an economist, I'm a data scientist. But by heart, I'm just looking at the data because we had such a high peak in the middle of 2022, in terms of the median house prices were still up year over year and on a month over month basis, the declines in price are very, very miniscule, to what we're kind of hearing in the media. So that's one thing, right? The median price is definitely a driving factor. Everyone's concerned about like, what am I going to get for my property? Where's the trend of our nationwide real estate market heading and even though we're in a slight downtick month, over month, if you look at long term, we're still up 10% on listings and up, you know, 2% on closed prices. Michael: It seems like there has been so much resiliency, if we're seeing such a miniscule price reduction month over month and year over year, there seems to be a lot of resiliency to interest rate increases for folks, and that they're still closing transactions, even at this much higher interest rates, and they're not saving a lot or really anything at all, in terms of the price that they're paying out the door. Brandon: Right, I think what's causing these prices to, I don't wanna say remain elevated, but kind of not declining at the pace that we would expect is that tight supply. Now, we're still a few months probably away from seeing how this kind of mass layoff and technology could affect the real estate market. Because, in my opinion, what's really going to drive these prices down is when we see supply, increase at levels that the demand has decreased and that imbalance in the market is what will really drive those prices down and the reason why kind of refer to that technology, layoff if that same style, that same volume of layoffs, hits other sectors of employment, then we're going to see defaults and people need to give up their homes because they can't afford it anymore. So unless something in outside of the real estate market really drives the demand. I'm sorry the supply side of the market to escalate at a very fast rate, that safety net is there to kind of keep our prices from really crashing, like we saw in 2008. We don't have the same supply that we saw in 2008. So we're kind of have that safety net there. Unless like I said, something really drives that unemployment up and forces people to default and give up their homes or sell their homes because they can't afford the mortgage anymore. Michael: But it's interesting, because from all the news that I've been hearing, and correct me if I'm wrong, maybe you've been hearing, the unemployment rate is super low. Like there just doesn't seem to be those mass layoffs that we saw in the tech industry, yet anyhow, affecting so much of the so many other industries. So it doesn't feel as imminent. Brandon: 100% right, I'm hoping I mean, just for the health of our economy, I'm hoping that that mass layoff doesn't reach other sectors and I hope that we're done with majority of it. But we're probably a month or two away from really understanding did that actually have an impact on our median, price per square foot or median close price of a property and then we can track those defaults, and those the supply over the next few months to see if that really impacted the real estate market or not. Michael: And that makes total sense. We'll talk this Brandon about those other two factors that you mentioned the price to list ratio, and then the days on market. Brandon: The price to list ratio has actually been on a pretty big decline. I think back in May 2022, it may have been June or May, I think we're at a multiyear high of around 102%. So most properties, were selling 100 or 2% higher than the list price, which means that it's definitely a seller's market, right. If I if I can list my house for X amount of dollars, I know I'm gonna get 102% return, I mean, I happen to present a 2% return on that is definitely a seller's market. We actually for the first time in about mid-August of last year, we're now down below 100. So that's just an indicator that the markets kind of switched right now buyers kind of have that power and that ratio now stands around 98%, which is kind of the levels before COVID emerged, and actually the lowest number since the first half of 2020. So we're not we went from a high of 102 in May to now we're down to about 98 which is definitely a key indicator that buyers now have more power than the seller's because of you know, just multiple aspects that we've been talking about the high interest rates buyers be a little more choosy. Even though the supply is down sewer buyers, there's not enough buyers in the pool to compete with me anymore. So I have a little bit more pool, which is why we're seeing that sale to list price or price to list ratio, starting to decrease. That kind of in parallel, what we see with that is to kind of tell that same story that we're now entering that buyers' market, even though demand is low, if you look at the volume of price drops, right, think about how many times a listing comes on the market for 100k. It sits there for 30 days, they come back and they say hey, you know what, let's list it for 95 maybe we can get more buyers, those price drops in terms of volume are actually up 142% year over year since the last time. It's just more evidence that buyers now because demand is so is so squeezing this high interest rate environment, they get more power listings are staying on the market longer list to or sale to list price ratio is down and then but yet the because supply still squeezed, we're not really seeing a huge impact that we're kind of seeing in the news right now, on the actual median price of all listings. Michael: Brandon, just out of curiosity, I think I remember if my memory serves me correctly, which it often doesn't, but like in the height of 2022, the max or the highest median home price in the country was like 395k. But do you happen to recall what that number was and maybe what it is now today? Brandon: Yeah, so if you look at the peak of 2022. So kind of that halfway mark, I think it was right around the ending of H 122. The actual median price is actually higher, at least according to our data, right? The data that we have availability to our actual median price was actually above 400,000. We're sitting right around like 420,000 was kind of that median price for closed listings for active listings was actually even higher than that. So for closed listings were around that for 120,000 range, right now as of the first week of December is kind of our data cut off. Right now in terms of the data that I'm giving you, we're sitting right around $380,000 as the kind of median price per square foot, I'm sorry, median price of closed listings, it sounds dramatic, and we go from, you know, that 420 ish down to three, it's a pretty big drop. But as you look at the entire time series from, we'll call it the pandemic, the start of the closed downs, all the way to today, if you bought a house, during those pandemic years, you're still doing really well in terms of the amount of equity, it's still in your home prices haven't dropped that drastically to where you're now upside on your loan, you're still well above you know, what you bought the house in, during the bottom of the pandemic years, what's really going to cause kind of some worry, and headaches is these people who kind of bought later in the year, kind of towards the end, or middle of 2022. Now, they're beginning to worry the most because they didn't have that same amount of cushion that these homeowners bought when they don't worry about houses a year or two years ago. So that number does seem like a big decrease. But if you look at the longevity of the time series of the pandemic eight pandemic shutdowns to now, you're still up quite a bit in terms of percent and you have a large cushion before you even have to worry about being upside down in a mortgage or, you know, losing a large amount of equity in your property. Michael: Does the data give us any indicators as to what's coming down the pike because obviously, data is rear looking. But how can we use that to be forward looking or is there a way to be? Brandon: Yeah, so I think you're talking about forward looking, you know, the next 6,12,18 months. If you look back slightly, we hit this topic quite a bit. It's a big topic right now in real estate is these large interest rate hikes. If you look at the timeline, the time series of the real estate market in terms of medium price terms of you know, list to sale rate of sale to price ratio, you look at, you know, the days on market, it seems that with the large amount of growth that we experienced in two years, you know, record growth, that was actually able to absorb a lot of the impact that people would assume, continuing to month over month raise this interest rate to higher and higher levels, they assumed that it was going to impact the real estate market at much a much quicker, much faster way. So then they can stop, right, the goal of raising interest rates tend to raise them forever. They're just raising them until they kind of see the market growth kind of settled down and adjust and kind of normalize. But it's kind of shocking when you think about how much and how quickly that interest rate rose and until a few months back. I mean, most of 2022 there was very little impact from those rounds of interest rates. So it's one thing that we can we can learn as, as we saw record growth, even that dramatic increase really did not impact the real estate market as we thought it would. Secondly, what's really kind of driving any sort of kind of negative view of the real estate market right now around this interest rate, is you gotta think of like purchase power of our homebuyers, right? We didn't see salaries raised at the same rate as the real estate market, we didn't see household income raise at the same rate as real estate. So the really big question here and the kind of the, you know, the driving force here is the purchase power of homebuyers. We actually seeing and this is from Freddie Mac, I believe a 32% decrease in purchase power, based on this 30 year, you know, FRM, that's given the same monthly payments for a loan made at the end of 2021. So we're really seeing a decrease in what homebuyers can afford and that combined with hopefully the Fed has definitely signaled smaller rate hikes in the future. We're hoping that housing fundamentals can hopefully come back to a quote unquote normal seasonality cycle and the expected returns, but into early 2023. I think we're still going to see you know, a real estate market that's just characterized by this continued tight squeeze on supply tight squeeze on demand. With the exception of what we discussed earlier, which was a major economic event causing mass layoffs or firings, then I'm thinking early 2023 is going to be characterized the same kind of, of patterns we're seeing now, which is tight supply, shrinking demand, days on market, increasing. median price is slowly decreasing month over month, until we see hopefully towards the second half of 2023, a market that's brought back to its normal seasonality and its normal housing market fundamentals. Michael: Brandon, I want to be super respectful of your time and get you out of here, man. But before I do if people want to learn more about you and the research team HouseCanary has a whole services that y'all provide. Where's the best place for them to do that or get a hold of someone? Brandon: Yeah, I would definitely just go to https://www.housecanary.com/ . From there, you can get a list of all the products services, there's probably people on our company that can explain the better business use cases and appear researcher, I'm all about the data. But if you go to https://www.housecanary.com/, there's plenty of people to contact through there and also, I'll attach my email. I'll pass it on to you, Michael after this. So you can share it with the listeners. Michael: Thank you so much for taking the time. This was super informative and definitely again, curious to see how things all pan out. Brandon: Yeah, stay up, same tune. I think next week, our new market pulse comes out as well. So if you're interested in different states and how the market is performing, and also at the national level, it's a free report and that report will be valid all the way up into the end of December. So it will have kind of our December numbers added to that report and you can see those trends going on there as well. So usually is dispersed on our website. Also LinkedIn, if you follow HouseCanary on LinkedIn, that report is shared monthly for free and you can see all those metrics that we talked about updated on a monthly cadence. So you can kind of have competence in your decision making process. Michael: Love it, love it. We'll definitely check that out as well. Well, thanks again, Brandon. Appreciate you and we'll chat soon. Brandon: Appreciate it, thanks, Michael. Michael: All right, everyone. That was our show a big thank you to Brandon for coming on and dropping so much knowledge, facts, data and statistics on us to help us guide our investing through these kind of tumultuous times. As always, if you enjoyed the episode, we would love to hear from you all ratings and reviews are always appreciated as are comments with additional topic ideas that you are interested in learning about. We look forward to seeing on the next one. Happy investing…

covid-19 united states ceo director university texas ai research chief current san antonio fed making sense feds real estate markets freddie mac sfr frm roofstock michael it michael yeah michael love michael brandon michael thank michael okay michael all michael hey

The largest risk that one has is being an employee, with Neil Timmons

Play Episode Listen Later Nov 19, 2022 27:18

Being only an employee leaves you vulnerable to the ups and downs of the market. Real estate investing is one powerful defense against job loss and economic downturns. In this episode, Neil Timmons provides insight into the real estate business and shares his experience with overcoming economic adversity to secure a robust financial position. Neil Timmins is the CEO of Legacy Impact Partners, where they invest in real estate opportunities ranging from houses and apartments to industrial and medical offices. In 2021 Neil published his first book, Unicorn Hunting for Real Estate Investment Companies: How to Easily Attract, Screen, and Land a Unicorn. The book is tailored to helping real estate investors find and retain top talent through the strategic systemization of hiring. Neil also hosts his own podcast, “Real Grit” where he pulls back the curtain on real estate investing through interviews with industry titans. “Real Grit” provides listeners with the tools they need to secure their lasting real estate legacy! Episode Links: https://legacyimpactpartners.com/ https://legacyimpactpartners.com/podcast/ --- Transcript Before we jump into the episode, here's a quick disclaimer about our content. The Remote Real Estate Investor podcast is for informational purposes only, and is not intended as investment advice. The views, opinions and strategies of both the hosts and the guests are their own and should not be considered as guidance from Roofstock. Make sure to always run your own numbers, make your own independent decisions and seek investment advice from licensed professionals. Michael: What's going on everyone? Welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum and today with me I have Neil Timmins, who is an author, a podcast host, entrepreneur, real estate investor and he's gonna be talking to us about going from an agent and employee to building a significant business in the real estate space and what it takes to do so. So let's get into it. Neil Timmons what is going on, man, welcome to the podcast. Thanks so much for taking the time to come hang out with me today. Neil: Good. It's so good to see you again. I appreciate the invite. Looking forward to this for some time now. Michael: No, likewise, the pleasure is mine. I'm super excited. So you and I of course know each other. We were chatting offline just before we hit record. But for anyone who doesn't know Neil Timmins, give us the background quick and dirty. Who you are, where you come from, and what is it you're doing real estate. Neil: High level out of Des Moines, Iowa, born and raised, started as a residential real estate agent built a built a brokerage there on to REMAX for a number of years was a top REMAX guy with my 20s and then eventually found my way stumbled into investing worked my way through single family investing, we still do a little today but morphed into commercial investing. And that's a primary focus today. Michael: Love it and I hear this this theme so often with agents start as an agent, got my teeth cut, then went into the investment side. My guess if you're a top performing agent, in your local market, you're making a lot more money on an annual basis than you would if you're investing. So why did you make that transition? Why'd you make that jump? Neil: Yeah, no good question. Well, the not so fun story is I was probably 31 ish at the time. Maybe 32, I came home one day to my wife of a decade in our three little kids, all about five or younger, and my wife had them all packed up and said she was leaving, leaving for good. I had spent the better part of seven years or so working like a dog every day of the week, I worked. My second year in real estate, it worked 355 days. So that business was built, ultimately, you know, I was able to put his team in place and that business, but it largely was built on my back and my effort and so it was at that point that, you know, I had an ultimatum and I begged and pleaded with her to go, you gotta give me give me an opportunity. I understand. So give me an opportunity. She did thank God. 45 days later, I sold my REMAX and took a whole bunch of time off to decide, well, how am I going to how am I going to do this? How am I going to make a living in contribute because I like doing what I was doing and not the not to the degree in which I did it. But I enjoyed real estate a lot, right? The people, all the fun things around it. So it took some time off to evaluate things and then ultimately plugged back in largely on the investment side. Michael: And today you own a business around the real estate investing space. Tell us about that. Neil: Yeah. So I own a couple of things. On the on the investment side of things. We're primarily focused on commercial investing, right, we buy by multiple asset classes, you're on a primary ladder, Des Moines, Iowa, we still do fix and flip in the office. Although I'm not largely involved, we've got a nice little machine that runs that really good. Contractor base in place, literally same contractor. Don't quote me on how many but we've done probably nearly 200 with the same exact crew. So it makes running things and the efficiencies there of all awfully simple. I love talking to people going you know what I don't like flipping because then I gotta go pick the carpet, I gotta pick the paint whatever else I'm like, What do you mean, you have to do that we picked it once. It's the same carpets, the same paint, same countertops, the same appliance, nothing, nothing changes. You're not doing a whole block of these things. It's not like anybody notices. You just pick it once yeah and so then also, I run an education business, which we launched this year, which has been very well received from folks who want to make that bridge want to leap into commercial real estate and, you know, figure it out either how to do their first deal or how to do their next deal. Michael: And I'm curious, Neil, because I also come from the education space, and the folks that you're working with, are they the DIYers or are they the folks that have heard of commercial and want to get exposure to it in some form or another are a mix of the two? Neil: Yeah, no, it's really DIYers. Yeah, that's not largely the passive investors, if you will, it's people who are active in real estate like, like using… if you will, you know, in my career was it just laid out you know, as well cradle to grave if you will, coming through I'd like if you were to go, how should someone progress? Although most don't do that, you know, they end up in one thing and often stick there, but I kind of work my way through that. Is this constant evolution of how do we elevate oneself and one skill set to take it to a to a new level and that's where these folks are they know they've done, they've done single family, they've largely been exposed to it, maybe they've been exposed a little commercial, but just haven't gotten to the results. They haven't they haven't been on a foundation, a legacy had been on a foundation of financial freedom and, you know, arguably, in mice that that commercial gets you there faster and easier. Michael: And within commercial because it is such a diverse asset class and really name where do you see folks going that are having the most success? Neil: Oh, good question there. You know, we bring people in, and we do a lot of things from a training standpoint, want to be in an asset class exercise to go alright, well, fill this little asset class matrix out, we have my hand if answer a handful of questions to go, you know, do you resonate better? Would you rather work with people or businesses, and we just bring them through a series of questions, and that lines it up to go well, top to bottom ranked, we focus on six level six largest asset classes, there's top to the bottom, here's what here's what it looks like and then my encouragement from there is, Listen, if number two resonates a whole lot better with you than number one on that list, that's what you should do, because it's just easier and you know, this, if we were to go work on something you can get passionate about, it's a whole lot simpler, then put a little more effort into it and something you're just like, huh, maybe? Michael: Totally, totally and, you know, I'm curious, so many folks, I think can go invest in single family on the side as a project as a test as an experiment, the DIYers that are doing commercial real estate, are they doing it on the side? Are they really jumping in with both feet, kind of like you did, and making this their full time gig? Neil: Yep, great question most are doing on the side, most are either stacking it on to their single family business or, you know, if they've got a day job and several folks do is they're doing this, you know, in the evenings, nights and weekends, side hustle, if you will and you think about you know, from makeup, a number of you were to go market to single family or markets or commercial just by being in commercial, the number of available prospects has been largely diminished. It's a much more manageable group of makeup, an asset class, let's say self-storage, you're going to go market self-storage is in your county, well, in comparison to houses, it is a mere fraction. So your ability to call text or you know, mail somebody or connect with a broker, perhaps it's very manageable. You don't have to do it full time. In fact, that would not encourage it, because you're gonna sit around, you're gonna get discouraged. Because there's candidly not enough to do versus the single family side, you could always find something to do. Michael: Interesting. Talk to us about kind of the exits and the thought process around the exit from that business. Because in my mind, and I think in a lot of other investors' minds, a house is a house is a house, you know what it is? I know what it is everybody on the street, you know, that you bump into knows what it is, and knows how to buy it, versus a self-storage unit. I could maybe Name one person that I know that's involved in that business and so if I'm trying to sell it, who's gonna buy it? Neil: Yep, no, exactly. So that's, you know, what I do on the training side is bring people through, even if you know, largely set some goals, understand why you want to be in this business, and perhaps what you'll do get through the training go, I don't want to be in the business. And that's okay, too. That's okay because what you don't know or what you what you now know, empowers you, right? To make a better decision about what the path you should be going down. So we bring people through that large infusion for retraining to expose them to what this world looks like, and then how to, you know, identify an asset class that really resonates with you how to price something up, how do we get leads, so largely from a marketing standpoint, from a lead standpoint, what do we say then? How do we value it? How do we actually put something a price to it to go alright, this looks like a potential really good deal, then how do we put it under contract and then from there, you know, the exit plans largely are or we get to resell the property. Occasionally, we get a property that comes in our wheelhouse, what I call, it's not our perfect seller, so it's a good deal, just not for us. Now, can we move that along, so to liken that to single family wholesale it double close it novated right, do all the same things in the commercial side or, you know, we decide, hey, this is our perfect seller with the property we want to own. So how do we how do we close it up or we get to raise equity? How do we go get debt and then how do we bring the whole thing together to properly manage it? So that's what we show folks how to do and ultimately starts you know, on the front end of the process to go Alright, how are we buying this because I know what our required returns are and if it doesn't hit that I'm that's gonna lead us down a different path to either go it's either a non-deal or we're gonna get this moved along to another investor and cash up the big check that we can utilize for the next year. Michael: Yeah, that makes a ton of sense and you use the term that I'm not frankly familiar with novate. What does that mean? Neil: Novation is that this has become very popular on the single family side. So there's a lot of buzz on the single family side, especially for those in the wholesaling business. Okay, it is to replace one contract with one another with another contract. So essentially, if I was to, you know, say, for example, I was to buy a property from Mr. Jones, I have a contract in place with Mr. Jones, I decided I want to move this property along under innovation process, you would then provide me a contract that would replace mine, there's typically a difference in pricing, right, you're gonna pay more than what I've just paid and that delta ultimately gets paid back to me. As part of the process. I'm high level in here. There's some moving pieces but high level? Michael: Yeah, okay okay. Great to know. Neil, I'm curious if we can zoom out for a little bit, because you went from realtor agent, which is a kind of a unique profession and that, yes, you are an employee, but also you are kind of the business owner, your own of your own little business, your own little domain, and then you went and put a team in place, and then you ultimately sold that business. But for so many people that are employees in a traditional nine to five w two employee position to make the transition from employee to business owner, I think is a big leap for a lot of people. What was that like for you mentally going from? I'm going to be an agent to now I'm going to start and run and operate a business. Neil: Yeah, no good question in it. I think that's, it comes in incremental gains, right. So how do you how do you elephant, right, one piece at a time and so the same thing occurred from me mentally and I think that is? It's a terrific question because I think so much of this business, in business in general is mental, right? It's a six inch game in between your ears and so how do you combat that I read a book when I was probably 20 to 23 years old. The Millionaire Mind by Dr. Thomas Stanley. He wrote The Millionaire Next Door, that's probably his most famous book, The Millionaire Mind was incredible and it broke it down to, you know how millionaires think and my thought process, of course, is well, if you just think like a millionaire eventually, and then, therefore, act and operate like a millionaire, I will eventually become one, right. So it's not it's not hard success leaves clues. So there was a lot of things in there that that impacted me at a very deep level and one of them, the biggest takeaway for me was, the largest risk that one has is being an employee. They can let you go any day of the week, this is what I came to believe in, it's still my operating beliefs today are just risky, if you have no control and I, I am well aware that as a business owner, as an operator, as a real estate investor, we take tremendous risk. There's no doubt about it but I still think they pale in comparison to putting all eggs in one basket, men have an employer of someone else. Michael: Yeah, it makes total sense. So as you started moving things along, and created and formed and founded your business, how did you figure out who the right people were to put on the proverbial bus because I think, again, so many people have either a great idea, and they're really good at maybe doing that one thing. But doing that one thing isn't a business and so how do you scale it and have a proper functioning, running operational business? Neil: Yeah, no, great question and that's, that's probably, if I was to attribute any of our success over the course of last three ish years, two and a half years, somewhere in that range, we've had significant success in that period of time, it's largely been correlated to my evolution as a leader, knowing that the only way forward is ultimately with and through other people. And so I've had a focus internal so go back to a question you just asked earlier, from a mental attitude of taking that leap. For me, it's how do I develop as a leader how to become a better a better person, somebody that people look up to somebody that people want to be around, so many people want to listen to, and, and be on the same bus with going rowing in the same direction and so that has largely, that's been a big focus over the course the last couple of years. When I was at a spot where he's gone, it's time to grow. You can't hire and retain a player's unicorns as I call them. You can't hire and retain unicorns if you're not one. So how do you how does one improve their personal self to be able to get to that level? That other a players want to be around? Michael: Yeah, that makes total sense. So what it what did you do? Can you open the vest a little bit, let us peek under the curtain… Neil: Yes, you know, it's, I wish there was a silver bullet here, but it's largely just been, you know, what do they say what's mentionable is manageable and for me, it's just having that Cognizant thought that okay, well, now, I'm mindful of this and so now I need to give thought to this. How do I say things how do I handle things? How do I handle certain situations? What is the impact when making this isn't with an employee or with a team or with a customer in front of folks, how's this gonna resonate? What does this look like and then having the vision as a leader, as any leader, doesn't any organization, that vision to go, where are we going and this isn't about me, this is about us and so oftentimes you'll hear me say, we did this, I almost, you know, I try very hard to say that 100% of time, I didn't do anything. We did this collectively, all the results are collective right. It is us together and that reading, continuing to stay focused on that, stay ahead of what's transpiring, trying to, you know, hosting a podcast being around other people like yourself, other people in the industry having an understanding what's going on. So been trying to be on that curve from a knowledge base standpoint about what's transpiring that's helpful, too. Michael: Yeah, yeah. I love that and asking for a friend. I hate people and I don't think I want to interview people and screen people and that sort of thing. Does that mean that I shouldn't start a business with my great idea? Neil: The first part is I don't like people. So let's just call that the introverted, right? They don't want to interact with other people. My right hand gal is an introvert. She's not very gregarious as it relates to people. She's very good with people. But she wants to she's far more task oriented about how do we execute on what we're doing? I think that's terrific and now, what hadn't you hire her because she's the Yang, right? It's Ying and yang. She complements me in a perfect opposite fashion and I do the same thing. The other way around. Yeah, it's, I think that's terrific. I think it's wonderful, if you can, what you just expressed was, you know who you are, if you know who you are, you can identify a path forward and I would encourage you absolutely. Knowing what your deficiencies are is wonderful. We're all we're all given strengths someplace, just balance this balance your weakness with somebody else. Don't try to what are the what don't master in the weaknesses, right? So anytime we have a weakness here in anybody, you know, largely for me, it's going just don't do it. Don't master in the minors, because at the end of the day, you're still going to be a d minus for you, no matter how good you get at your weakness focus on your A's. Michael: Yeah. Oh, that's such a good expression. I can't tell you how many times I've heard people say, oh, I wanted to visit with my best friend. We're so similar that I'm like, that doesn't sound like a good partnership. Neil: Sounds like sounds like a great bar and I but not a good business decision. Michael: Yeah, I know. Totally, yeah right. Neil, if we zoom back into the commercial side of real estate coming from the single family space, what is it that you see is the biggest hurdle of barrier to entry for folks that want to make that leap into commercial but utilize someone such as yourself to help them get there? Neil: You'll never guess us? Are you ready for this? Michael: I hope so. Neil: I know, you're it's a mental barrier. It's all made up in their head. It's they don't think they can't. Yeah, but they don't think that that is it because past that, the ability to go well, okay. Well, if you've ever let me let me liken it to single family. A duplex is like a single family rental house, right? It's just two doors and the numbers change a little bit? Well, a 20 packs is the same thing. There's largely, there's not much difference in these things you're adding some zeros are calculated a little differently, but it's pretty much the same. In fact, management, in my opinion, gets easier. The more doors you have, right, you get professional management, you get it, it becomes simpler. Yeah and then to make a change to go into some other asset class, we just have to make a bridge. What does that look like? They have to go to an industrial buildings on a triple net lease, which is probably the simplest thing to calculate and get one's head around when you're going, well, they just pay a lease rate, and then they fix all the stuff that goes wrong with it, right? That's it your true and your true and why is the rent, we've got multiple properties like that and we're the management company, which means we just get the rent and never hear Yeah. Michael: Yeah, that's by far the easiest piece of property in my portfolio is triple net. Neil: Yes, correct. But people are, you know, we're scared about what we don't know and that's true of all of us, right? We're scared about what we don't know, afraid to make mistake, which is totally understandable and so we just help folks, we educate them as we go answer questions as we go and show them the exact path to be able to get from, you know, I want to learn more about commercial real estate, I'd love to be able to buy a deal to actually get to a close. Michael: That's awesome. And I'm curious, Neil, what's your favorite asset class and why? Neil: My favorite asset class, although I own I'd have to calculate up four or five different asset classes, but my favorite today is going to be industrial. Michael: Industrial why is that? Neil: Yeah, industrial is in demand like crazy. Secondly, in 2021, had the second largest rent increase across all asset classes, only trailing two apartments. But in comparison to apartments, they're far easier to manage, right, I get a triple net deal, or a double no deal, there isn't much to do, there's very few moving pieces you end up with, on average, let's say a five year to 10 year lease is pretty straightforward. Michael: Okay. So if I'm playing devil's advocate here, and we're looking at this industrial building, this is suited only for a business. This is not for people can't come live here and the type of business you might have to build to suit it out for that particular business 5-10 years down the road, that might be a future Neal problem. But let's drive down that path that tenant leaves goes out of business, what have you economy turns? If businesses aren't doing well, in the area, are you stuck with this vacant building now? Neil: 100%. If businesses are doing well in the area, meaning they're laying off or not employing people, my thesis is you still have you still have an apartment problem relative to occupancy and or rent rates. This goes back to earlier question is, admittedly, we have to take a risk someplace, right? It's just my comfort level and I like the box, you know, not a somehow engineering building has been added on to or defined for one, one person's exact use, I like a big giant box, just a rectangle, that's it, a business of multiple businesses come into that and fill it out in which way they want to. So like the fact that if I can buy my, my preferred buying is for buying some older not buying brand new stuff, buying some older buying something with a value add or on buying at a discount of some managers, the intent is to buy it correctly. And if I can buy a property, let's call it make up a number right now 70 to $80, a square foot brand new construction is gonna be 120 to 130 a square foot, I think I'm in pretty good shape over the course of coming years, I think that my dollars, and my rent rates get pulled up to the fact that sheer cost of new construction is gonna be 60% higher. Michael: All right, I dig it, I dig it and for anyone, I'm just realizing now, some of our listeners might not be familiar with the term double net triple net lease, can you give us a quick definition of what it is? Neil: Yeah, it just defines what people pay for double net, for example, is probably one of the least likely terms that use but let's say triple net triple net means ultimately that the tenant pays for everything, there may be some nuances inside the lease, but taxes, insurance, repairs maintenance, the tenant pays for that. So if your releases 100 grand a year, your net is 100 grand a year before, before your mortgage, any sort of debt payment you have on it. A double net means they don't pay for everything they pay for perhaps taxes and insurance, but not all the repairs and all the maintenance, and therefore your NOI is gonna be a little lighter, depending on what you have to maintain and pay for. Michael: Okay, perfect and I'm sure some of our listeners are hearing that and thinking like, this is the best thing since sliced bread. I'm gonna go put all of my single family homes and all my apartments on Triple Net leases. Why is it only a thing that's been heard of in the commercial space? Neil: Yeah, no good question. You know, to liken it to single family, you're like lease with an option or a contract sale, that's probably the closest thing you get to a triple net in the in the single family house side, right? So you kind of contract sale, somebody that mean that contract buyer is now responsible for everything associated with that house, right? That's what it looks like. If you look at the closest thing, there's some differences there. Obviously, a contract sale into a down payment interest rate. That's not the same as a triple net lease on the industrial side but that's probably the easiest way to liken it to single family. Michael: Yep. Yeah, that makes total sense and for anyone listening, like Neil mentioned, it's just the cap rate is like the easiest thing ever in the Analyze easy thing ever, you got a million dollar building cap rate 6% they're paying 60 grand a year, then bam, boom, end of discussion. You're not paying taxes, you're not paying insurance, you know, capex and maintenance. So you can calculate your true return, and then look to calculate what your debt service payments gonna look like and determine what your return looks like after that, versus the traditional single family rental or apartment or traditional residential space. They pay you a set fixed amount, the rent, and then you have to go figure out the taxes, insurance, repairs, maintenance, capex, that sort of thing. Neil: So hey, just because I like it or you know, in other investors likes something else doesn't mean it's right. There's only what's right for you. Michael: Yeah, yeah. I love it. Neil, this has been so much fun, man. I want to be very respectful of your time. Let's get you out of here. But before we go, like where can people reach out to you find out more about you continue the conversation if they're interested? Neil: Yeah, no, great question. Well, if you want to learn more about commercial real estate getting rich in what I call the 20x niche, why do I call it that? Well, because our target internally is to produce in a monthly return that's 20 times that of us Single Family return so we're scaling up largely is just go to my website give you a free download free report just you can learn more about the industry getting into commercial. So www dot legacy impact partners forward slash gift JF T legacy impact partners Ford slash gift: https://legacyimpactpartners.com/ Michael: Right on thank you so much and before I let you go I mean I'm not gonna let you out of here without mentioning your podcast you're also the host of a podcast was that was a you're kind enough to have me on what is that called and what can people expect to hear on it? Neil: Real grit is the name of it it's about the trials tribulations anybody from real estate. So we talked about single family talking about commercial talk about everything in between. But really, so that we fully admit that you know, life isn't all about Lambos and big houses on cash and checks and everything on Facebook that or social media wherever you'd see it right? That there's ups and downs there's, there's we have to go through stuff and many times to be able to find our own personal success and so we talk through that and people's personal stories and how they got there because all bunch people, they get their different ways and it's really exciting. It's, we get into some really interesting, very dynamic conversation a lot of fun, love it. You and I had a great conversation. Michael: I had a ball. I had a ball. Neil: It was a blast, man. Michael: Awesome. Well definitely go check out that podcast, real grit, a lot of fun, really cool stuff going on there. Neil, thank you again. Any final words thoughts for our listeners? Neil: No, you're going to find me you know, like I shared it though the website I'm also on all the all the social media platforms. Facebook's the best place to find me Neil Timmins, or there are many Amin just spell it right you got me Michael: Right on, many thanks again. Appreciate you, see you soon. Bye. Neil: Bye, bye. Michael: All right, well, that was our episode. A big thank you to Neil for coming on the show. Really, really interesting stuff that Neil's been through seen and experienced. As always, if you enjoyed the episode, we'd love to hear from you with a rating or review wherever it is get your podcast, and we look forward to seeing on the next one. Happy investing…

god ceo talk real land risk iowa employees unicorns screen largest yang contractors analyze des moines amin noi re max ying single family cognizant millionaire mind timmons millionaire next door diyers lambos thomas stanley roofstock michael yeah michael love neil timmins michael okay michael all neil it neil you remote real estate investor neil oh michael awesome

Why you might want to have a Public Adjustor on your team

Play Episode Listen Later Oct 29, 2022 26:34

In this episode, we welcome Public Adjustor, Andy Gurczak to speak about the role of PAs, and how you can make the most out of the undesirable experience of haggling with your insurance provider -- ensuring the highest possible settlement under the terms and conditions of the policy. Andy Gurczak started in construction as a laborer and got his in as a public adjustor through a contractor he worked for. Quickly climbing the ladder, he helped grow the business by attaining new clients and further building relationships with existing clients. Andy started his own company, AllCity Adjusting, where he and his team process over 1000 claims per year. Andy's Contact Info: https://www.allcityadjusting.com/ c: 708 655 4186 --- Transcript Before we jump into the episode, here's a quick disclaimer about our content. The Remote Real Estate Investor podcast is for informational purposes only, and is not intended as investment advice. The views, opinions and strategies of both the hosts and the guests are their own and should not be considered as guidance from Roofstock. Make sure to always run your own numbers, make your own independent decisions and seek investment advice from licensed professionals. Michael: What's going on everyone? Welcome to another episode of The Remote Real Estate Investor. I'm Michael Albaum and today with me I have Andy Gurczak with All City Public Adjusting. And he's gonna be talking to us today about what a public adjuster is, and why anyone who owns property should consider using one if they have an insurance claim. So let's get into it. Andy, what's going on, man, thanks so much for taking the time to hang out with me today. I really appreciate you coming on. Andy: Mike, thank you so much for having me on. It's a pleasure. It's always it's fun to do these. So I'm excited. Michael: No no. It's truly my pleasure. You're the first like we've done I think this is episode 300 and change and you're the first public adjuster we've had on so anyone who knows me knows that I'm a total insurance nerd and insurance buff so but for anyone who's not familiar, like what is a public adjuster and kind of give us a quick and dirty of what you're doing in real estate. Andy: First of all, Bravo on 300 episodes. Plus, that's awesome. So thanks for you guys. And I'm lucky PA so this is pretty cool. Yeah, so public adjuster is is licensed by the state, he's legally able to represent the insured in their claim process, negotiate and settle the loss for them. Whether it's commercial or residential. It's basically like having an attorney on your side or an accountant doing your books. It's the same exact thing. They're licensed by the state that they work in as well. Michael: Okay, okay. And I mean, it just seems like kind of counterintuitive. I go and pay an insurance company every single month, every single year to give me insurance. Then when I have a claim, an insurance claim, I go to the insurance company said, Hey, insurance company, here's this claim, pay me for the claim what I'm owed. So why do I need a public adjuster? Like why does your job even exist? Andy: Yeah, that's a that's a great question. The reason our job exists is because insurance companies don't pay claims and don't pay them fairly. We've talked about this before the show, Mike, you work the insurance side. So you know, that claims, actually two people that work in our office work the insurance side, and they've got they seen how bad a guy and came to our side. Because claims are handled, I mean, horribly every year, it gets worse and worse. And our we just had a meeting with a couple of attorneys just discussing what's going on and what we could do in some situations, because it's getting so bad, that, you know, insurance companies aren't responding for a month or two months, or just I mean, so having a PA on your site, even though it's your claim, and you think you have to remember that insurance adjuster, that staff adjuster and every one that they send out every vendor contractor they sent out, they all get paid by the insurance company. So they're all working for this one entity. And then you're by yourself. And you're thinking, well, they're on my side, no doubt on your side. It's all about profits, margins, all that good stuff. So… Michael: Yeah, I know it's so the word of news is sick. When you find out kind of what's going on under the hood. It's really what should be a partner relationship. Like you mentioned, everyone on the same team working for the same goal can be come very contentious very quickly. So you said it's like having an attorney or like having a bookkeeper on your side? I mean, it sounds expensive. How much do public adjusters charge? Like, how does that work? Andy: Easy. Yep, Pa is most of the time charge a contingency fee. So there's no retainer is nothing, it's all contingency on what they recover. And you know what the claim settles for. And standard is 10%. Like our company has adopted just a 10%, nationwide, whatever claim we're handling, whatever the size is now, some situations where we come in, let's just say months after a year after the claim has been paid, and we're just trying to figure out maybe another coverage or paid additional than it might be a higher fee of maybe 20-25 on the money that we recover above that amount that would the only difference, Michael: Okay, and so just so we get it crystal clear for all of our listeners, because I just went through this on a claim to fire claims I had on a property. If the insurance company comes into my claim, and says, Hey, Michael, we're gonna give you $100,000 For your claim, and I'm like, There's no way it's gotta be worth way more than that. You will come in or a public adjuster comes in, you end up getting me a million dollars, you're gonna take 10% of that additional 900k That you got me above and beyond what I was originally awarded. Andy: Yeah, exactly. And something in your situation. So when we have claims, and we have large investors and management companies, we have a pay scale that actually the percentage goes down once it reaches a certain amount. So reaches, you know, half a million that 10% may become nine, right for every client, we kind of work with them, just because we kind of know their position. And again, we want to create a relationship that is long term, because then we're getting called when before the claim even starts right because we want to be there. You know, another question is when do you want to hire PA for the day you have a claim, because you want to make sure if that claim is a legit claim, if you should even file that claim, whatever your deductible is, is that even a covered loss? A PA will, you know, we do this for our clients all the time we do their policies with their claims without making any money or charging any fee. It just part of our relationship with our clients. Michael: Okay, I'm so glad you brought that up, Andy, because I get this question all the time. Because so many people don't like, insurance, education is not something that's really provided out there. And I'm wondering if that maybe is on purpose by the insurance companies, but like, how should people if they have something happened to their property? And statistically, if you own a property or enough properties long enough, you will probably have a claim? So what's the process? Like if you could articulate and paint us a picture of as a property owner, whether it's our own property or an investment property? What should that process look like? What should what should owners be doing? Who should they be talking to? Andy: Yeah, if you don't have a PA, and you're kind of going to try to do this on your own, you want to first stop whatever loss happens, you want to mitigate the loss, right, you want to get first you want to you want to get your copy of your policy to you want to see if your agent because you most likely don't have a copy, because no one knows that they don't have a copy until they have a loss to be like, Oh, I have this page, I'm gonna get your declaration, you need your policy, your booklet, you know, no one gets that usually, until something happens. And then it's hard to get it from the insurance company, it's like, they don't want to give you your own policy, very normal. Then you want to mitigate the loss. So if it's a fire, you want to board it up, protect it, make sure no one can get in there. Or if it's a roof, you want to cover the roof, if it's a roof claim, and then you want to go and take pictures and document as much as you can, and then call the claimant. And when you call on the claimant and you're trying to set the reserves high enough. So then when they come in, and let's just say you have $100,000 loss, but when you told them the claim, you might have said, well, it's a small fire in the kitchen, small smoke, they might have reset the set the reserves at 25,000. And now the claim is actually 100. So now when we're trying to fight it, we're going to five managers like what's the example at State Farm, for example, once it goes past the reserves, you're going through letters like five managers to approve one payment are one extra additional line item, it's it gets really crazy. So the most important is mitigating, mitigating the loss, getting your policy, reserving the claim calling the claimant, right? And if you don't know the answer, when you're discussing that claim, when you're calling it in, just say I don't know, because a lot of people get into trouble by trying to say too much to be too honest. And it's not about being honest or not, or, or lying. But people say the wrong words, they might use the word like mold, I see mold. Oh, well, molds not covered. Here's a denial letter. Well, the water, you know, the water happened three days ago, we have there's mold, because you know it's wet, it's humid mold molds catch up, but there's still water damage that's covered. So different words they use. So you gotta be careful with words you so you want to do your due diligence, or even call your agent to call that claimant for you. If you need help. Michael: Let's talk about that for a minute. Because in the agent world, you have captive and non captive agents. And so just like you were saying all the vendors are paid by the insurance company. I mean, in a lot of instances, aren't these agents paid by the insurance companies as well? Andy: 100%. And I have friends that are agents and I know people are agents, and agents have a bonus if their clients don't file claims. So there is a bonus, there's a perk of them if their clients don't have claims or the correct. So everyone's got a benefit if the claim is not filed, and if it's underpaid, everyone gets points on that. Michael: So can we surmise that if you have a claim, you should just call a public adjuster immediately? Andy: 100%. Because it's a free review, what's the worst is going to happen? He's going to come in there and say don't file it. You don't have to sign with that PA but at least get that expertise. Now you want to make sure you find the right one. But if you do you have them looked at it and in depth look at the claim inspect the roof, inspect the fire damage inspector water damage and let you know everything you should do. Michael: Yeah, I am. I had my first big claim to have them back to back couple years ago, I had two fires in a commercial building back to back a week apart, which I used to work as a professional fire protection engineer. And it's like statistically impossible to have that happen. I'm the one exception, right? So I went through the claim process I had the insurance company come out do their inspections like oh, it's small fire just like you said, you know teeny tiny claim payout. And I'm like dude, that doesn't even cover the materials that were sitting on the roof when I had the roof fire. So I brought in a public adjuster and they know about 15Xed that claim. So I can't sing their praises enough. When someone is searching for a public adjuster and you just mentioned this, you want to find the right one, like what does that process look like? What questions should you be asking? Andy: I've never been on the other side. When I look and talk to our clients how they found us obviously they were looking online Googling and stuff and they were doing a search engine and kind of we came up online we do a lot of blogs and stuff. So we'll come up there with a lot of tips and stuff for people so they'll find our name. Otherwise, so if you're not looking online, you know, you can check websites like patio, which is Texas associations of public insurance adjusters, California has their own, some states have their own. There's the NAPIA National Association of Public Insurance. So there's different associations that you could go on, and find adjusters pas that have been screened and have backgrounds and pay their dues, because they're part of an organization. So that would be your, you know, your best bet. Referrals. Again, if I, if I knew you, I would say, Hey, Mike, you had a couple of fires, you know, did you hire who's a PA, you have someone to recommend. That's, that's your best bet. Someone that they worked for referral. Michael: That that has had the actual experience with them? Yep. Okay. Are there certain questions that someone should be asking? I mean, what separates the different pas that are out there? Because I'm sure if I google that would get tons of different results. Is one better than the other? Like, is it just based on the fee structure? What should people be be considering? If they're going to hire someone? Andy: That's an awesome question. So a lot of what you should be asking, and when you go online and look for PAs, a lot of them say, you know, fire water, they do all these things. But 90% of PAs handle just roofing claims, usually residential, some commercial. So it's, you have to make sure that hey, how do you handle fires? And how many fires have you handled? Or what do you specialize in? You might say, Well, we do a lot of roofs. That's not the PA, if you had a fire, you don't want the guy that's handling roofing claims. Right? For us, we do large loss, fires, water, hurricanes, we don't if someone calls for a residential roof. We don't we don't do residential roofs, we would love to, but we don't we don't specialize it. There's other PAs that do a great job, here's a couple of names you can call or, you know, Google and and find the problem just and it's in that it's just a committed, you know, attorney, some attorneys do, you know, personal injury, some do properties. Same thing with PA some PAs are better at some coverage than others. Micael: Yeah, that makes total sense. Andy, let me ask you a question. Because it happened to me. And I'm curious now with the hindsight, what the proper move is, so I had this fire, and it was on the roof. And it was during a reroof. So they had all the materials up there. So all the materials burned up. And my public adjuster said, Don't touch anything on the roof. He said, We got to come out, we got to photograph everything we need to take care of, you know, we need to document everything. And meanwhile, it's really windy. There's debris blowing onto the neighbor's property into their, into their, into their courtyard and their fence. And so the neighbors called me complaining threatening to sue, they got crap blown everywhere. And I'm like, I can't it's like an active insurance investigation. So you were talking about you want to mitigate the loss stop the loss from getting any worse. But are there instances where physically mitigating the loss than is like evidence tampering is the wrong word, but you understand how it's changing the scene. Andy: Double edged sword? Yes, a double edged sword. We walk into properties all the time. And you know, or let's say we go into a hurricane area, or right now in Florida, and we see people outside with all their contents, right? Like all their house stuff, just in a pile. And I'm like, did you guys order material? Everything's gutted? I'm like, did you guys inventory take pictures? Well, no, but the insurance company said to just throw everything up. That's the worst idea ever. That's what they want. You just get rid of all your evidence. So that's a double edged sword. So when I say mitigate, you're supposed to mitigate the loss because they can technically your duties after last say you will mitigate. So if you don't, they can deny it. But what's mitigate right? If I had a pipe burst from the third story water comes as floods my whole house right? The insurance company is going to want to send a vendor out to pull some drywall or spray everything or dry everything and leave it. That's the goal. That's mitigation. But mitigation is you turning off the water. That's already mitigation, because it doesn't specify what technically mitigation is. It just says mitigate. So by me turning off the water, I have mitigated the loss. And I will tell my insurer just leave it because it's already all damaged. Whether you dry it or not, that's just gonna go against your thing. It's already damaged. It can't be its category three water. So it's got to be all replaced. Instead of paying a vendor all this money, this has got to be gutted, all that money should just go to you instead of that vendor. So yeah, there is instances. So in yours, just because we have insurance, karma saying any Can we start rebuilding? Well, now because we're still fighting with the insurance company, and we're still negotiating, and if you start the repairs, then you you can date that's what they want. They want to keep holding, holding until you actually accept it and start the repairs. Now, if they don't start the repairs, then they'll go well, why didn't the insured start the repairs? Right? So it's, we're trying to keep our clients in the best situation to make sure it's the best possible outcome. But it's hard sometimes, especially with landlords when they have tenants, right? Hey, my tenant is going to sue me or my tenants gonna go this if I don't do the repairs. Then do the repairs, I guess. And this is the settlement we're getting. So an insurance company knows this. So, in your situation. That's a tough call. What do you say like either the PA say, Hey, we got to do it this way. And he was doing it the right way. Because if you did mitigate or clean up that thing? And they come in? They're like, ah. Even if you document it, I'm telling you, it's like they don't even look at your photos. They don't care. Yeah, so they did the right thing. Michael: Okay, good. Well, that's good to hear. I'm gonna go, I'm gonna go send them another thank you text after this episode. Yeah. Andy, can you give us like, maybe two scenarios to stories that you've experienced one where things went perfectly well, or as good as they could have gone and what you you're insured what your clients did to get there. And then maybe a scenario at the opposite end of the spectrum where things just like, just like, give us like the worst thing you've ever seen happen? Just so we have a little bit of context that… Andy: Part of like claim handling or like? Okay, so I'll tell you, we were just like I said, we had the attorney, we were kind of going over claims and we have one, and I won't say the insurance company. This is in Gary, Indiana. This this poor lady that waged her claim has been handled, and it's by an adjuster that we've seen handle bad claims for other people in that area. Whether it's color, race, area, I don't know. But the way this this claim has been handled this lady the under oath and everything she's been through, like we thought we had it all over, they finally after six months, say okay, well pay the claim. And here's the money, we got to argue with them. They started at 30,000. It's $160,000 claim. But then we have contents another 160 that we sent wants to go and now we're asking what's going on with the content. So they come back well, well, which which was the insurance and which was her daughter's. Why does it matter? If you had a fire Mike, and you have your kids and your wife stuff in the house? That's all personal property? They're not on the pile? Are your kids on the policy now? Yeah, no kids are on the policy, but their stuff is covered. Right? So why are they're asking her so now they want to examine her again and her mom. So this is going to drag on for 10 months. So this and this claim is ongoing. So to us that to me, it's like, well, now I'm powerless as a PA. But what can I do? So the only way is the attorney can help. But again, she's still going to have to do that examination. But it just shows how long they'll drag it and try to find ways of however, to underpay or just deny that claim. So that's bad. Yeah. And we have a bunch of those. So those hurt a lot of them, we win, this one again, we got the structure paid and figured out. Now we thought the contents was going to be a slam dunk, easy. Here's everything, even your vendor said, you can't clean this stuff. Great. Here's the list. Here's the pricing age of items. And now they come back with this. So, another tactic to delay the claim. On a good note, we had one, it was a it was from another podcast, one of the investors students called us, he got the number to us and he called us he had a 16 unit in Champaign, Illinois, burned down here to ACV policy, you are familiar with actual cash value. Your listeners might not but meaning he would not recover depreciation, he would not get that amount even if he rebuilt. So he was just getting what's what it's worth now. So that building, he had a fit 550 limit that just came in, he wrote like 560. And they depreciated and cut him a check for maybe 300,000, something like that. So when we got hired, we sent our letter representation, and the adjuster called and said, Hey, Andy, you know, I paid this, I paid this to Max, I don't know why he hired you. I'm like, Well, you didn't pay loss of rents. And also you haven't paid demolition expense, and you only paid 300 when it's a 550 policy, you stopped writing, because our estimate is like 900,000. With no like edit, like this is just it. So then we reconcile and the insured ended up getting 100%. So 550 plus 5%, debris removal, some other endorsements, plus he maxed out everything. So he ended up walking away with another 400, like 300K. So again, when an adjuster says, you know, we don't need you. And that's it again, there's many claims like that, those are the positives, it's the ones that drag on, and that you like, you know, you're close, but they're still like delaying, delaying, delaying. And it's like they want the insurance to just finally say, Okay, well, I'm done. Michael: I'll just throw in the towel. Andy: Yeah, it sucks. And, you know, there is statutes in each state, which they have to follow, but it's never followed, because no one ever calls them out on it. Because unless you actually go to court or litigation, that's when they show okay, we didn't do this. They didn't do this. But other than that, they don't really know. They kind of do their own thing. Michael: Yeah, because they're so big. And you bring up you bring up a really good point ACV versus replacement costs for anyone that's not familiar with the to give us from from like the PA side of things. What is the benefit of one versus the other? Because I'm sure your clients have seen like the reason your client probably had the ACV was because the replacement costs value on that 70 unit 50 unit was just probably astronomical. So it's often a cheaper policy to get like what's the downsides of going with one versus the other and what risks do people run by choosing one versus the other? Andy: So the riskier is with the actual cash value policy and most most policies are RCV based. And then they have the actual cash value endorsement that says we only pay actual cash value, what happens is why you would do that policy where some people might get that policy and our insured wasn't even aware of it. But the agent sold it to him didn't explain to him the differences. He didn't know that he had that extra cash value policy. So you know, that's another story. He went on his own. But, so what happens is you, it saves you a lot on your premium, especially if you're investing you're trying to make margins and you know, it could save you on a property like that 2-3-4K a year, right? Well, it's great until you actually have a loss, when you have a loss. You know, it's especially on older buildings, it's cutting your payment by half. And you can't recover that money because it's actual cash value. So the replacement cost of you know, your home today is 300,000, but the actual cash value after depreciation, your actual cash value is 150. Well, you're only getting that 150. Even if we got the settlement of 300. With insurance, your policy will only allow for the actual cash value of 150, which will leave you with only half the money to rebuild. So you're always as an as an insured, you should always have a replacement cost policy. And now they have you know, different like guaranteed replacement costs and all this other openly, openly insurance actually has it. They don't even have its guaranteed replacement, because they don't even have a limit. I think it's up to one like there's no limit on structure a Michael: Holy smokes. Andy: So there's some new carriers that are really, really, really good, actually. Michael: Okay. And that brings me to my next point. And I'm so glad you brought it up. Like Should folks be involved in public adjusters in their insurance carrier decisions as they're looking to go place insurance on properties? Andy: I would hope so. Because all we do is read policies every day. All I do is read policies interpret policy. So I know when I'm looking at a policy, I'm like, Well, you have a good policy, but you don't have you have a finished basement, you don't have any water backup, you your roof is actual cash value only. Oh, I didn't know that. I didn't know there's a lot of stuff you you should be aware. So yeah, our longer term clients will actually inspect their properties, look at their policies to make sure they don't have any exposed liabilities. Right. Now, it's not our job. It's the agents job. But most of the agents now are just, you know, selling policies instead of actually doing their due diligence and ensuring the claim the right way, they insured. Michael: Yeah, I just want to echo exactly what you said, for all of our listeners, like now the public adjuster that I worked with on this on these fire claims, I sent him every policy and every quote that I get for properties, and he told me he's like, happy to do it. He's like, Yeah, this is a great carrier. But this is the other thing. And also, he can tell me like, Hey, I've run up against this insurance carrier, we see them all the time, like they don't pay claims, we're going to be working together a lot more if you have a claim if you go with this company, which is super great insight to have. Andy: That's, that's awesome. And that's the same thing. I would say, I would say this carrier, we have a lot we have, you know, this many claims every year. And you know, maybe it's a lesser policy, and that takes longer, but they'll pay the claims, right? These guys just don't pay or they didn't know, I have a list of insurance companies that I know that are easier to deal with. Now, it's your claim guarantee you're gonna be paid when you file a claim with them. No, it still might be a hard process. But they're much easier than these eight other carriers that they're that are out there. Michael: Yeah. This has been so great. Andy, my last question for you, man. How many claims do you handle a year just out of curiosity? So I can we give people an idea of… Andy: Yeah, we do over 1000 claims a year? Michael: Well, but how many how many public adjusters in your office? Andy: Oh, right now we have four. Right now we have four and we're just we just keep growing. We do a good job marketing and, and building our social media presence. And yeah, it's, it's, it's good. And I mean, I guess it's bad for the insurance. Maybe these claims are handled. But yes, tactically, we, our business grows and we get more calls. Michael: That's awesome. And I want you to share with everyone your contact information where people can get a hold of you and like what kind of I know you said you don't do residential roofs, but what kind of claims should people consider reaching out to you for? Andy: Any fire, you know, water claims, you know, whether it's broken pipes sewer backup, we can inspect those or at least advise sewer backups, usually, or water backup limits, they usually have a limit. So I see your limit is 10,000. I look at the photos and I'm like, Well, you max out the limit. You don't need a PA this one's just a max policy easy. A lot of people that call us if we get to two calls, three calls a day of clients that we just kind of give them advice because there's no need for a PA in some instances, they will but we can give them at least advice and help them out. But fire claims hurricane even commercial roofs we do commercial roofs a lot. Residential roofs is just the one thing we don't really do. Just because we we don't have the staff to do it. So… Michael: Yeah, okay, fantastic. And for people that want to reach out learn more about your take advantage of your services, what's the best way for them to do so? Andy: The easiest way is my cell phone. It's literally for your clients they can for your listeners, they can call me it's 708 655 4186 that's literally my cell phone. They can text me call me I'm really easy to get a hold of while I still can. I'm able to get my phone away so write it down because I might have to switch here I might not be able to give my phone away and my wife gets mad with more calls. Michael: I hope you're so busy that happens. Andy: So ya know so far so far. Okay, wife's not getting mad, so… Michael: Awesome. Andy, thank you so much, man. This was super great anyone watching the video could tell I'm super giddy talking about insurance stuff. It's so great to meet someone that's also as giddy so no, I really appreciate the time. Andy: No, it's fun to actually have a host that actually knows that that area and yeah, it's fun. You You know you've been through it now yourself. So you kind of know the you know, you know, you know what we do and what a PA can help. So it's, good. Michael: Big time, big time. Well, thanks again, man. I'm sure we'll be in touch. Andy: Mike, thank you so much for having me. I appreciate it. Michael: All right, everyone. That was our episode with Andy, A big thank you to him for coming on and sharing some great information, some great knowledge and wisdom with us. Definitely. If you are someone that is going through an insurance claim or will go through an insurance claim in your lifetime with the property you own, definitely consider hiring a public adjuster they are worth their weight in gold. As always, if you enjoyed the episode, please feel free to leave us a rating or review. We'd love to hear from you all in the comments section and ideas on future episode topics. And we look forward to seeing on the next one. Happy investing

california texas google public illinois indiana bravo pas 4k referrals residential googling 300k state farm champaign acv rcv roofstock michael yeah michael well michael so andy gurczak michael okay michael all andy mike remote real estate investor michael awesome

Are higher interest rates prohibitive to making profits in real estate today?

Play Episode Listen Later Oct 22, 2022 35:22

Aaron Chapman is a veteran in the finance industry with 25 years of experience helping clients better understand, source, and finance cash-flow positive investment properties. He advises over 100 clients a month in the acquisition and financing of their investment properties and primary residences. Aaron is ranked in the top 1% of mortgage loan processors in the country, in an industry of over 300,000 licensed loan originators, closing in excess of 100 transactions per month. In today's episode Aaron gives us his take on the current interest rate and inflationary environment, where he sees things going, and his thoughts on what investors should be doing in a time like this. Episode link: https://www.aaronbchapman.com/ https://apps.apple.com/uy/app/qjo-investment-tool/id1533823468 --- Transcript Before we jump into the episode, here's a quick disclaimer about our content. The Remote Real Estate Investor Podcast is for informational purposes only, and is not intended as investment advice. The views, opinions and strategies of both the hosts and the guests are their own and should not be considered as guidance from Roofstock. Make sure to always run your own numbers, make your own independent decisions and seek investment advice from licensed professionals. Michael: What's going on everyone? Welcome to another episode of the remote real estate investor. I'm Michael Albaum and today I'm joined by Aaron Chapman, who's a lender, investor, bearded man and entrepreneur as well as an author and he's going to be talking to us about inflation and using long term debt as your battle ax against it. So let's get into it. Aaron Chapman, what's going on, man? Thanks for taking the time to come hang out with me. I appreciate it. Aaron: What's happening brother thanks for the invite. I think I kind of pushed my way in a little bit but I just Michael: Invite, forced invite. Aaron: Let's put that way. Michael: Ya, no happy to happy to and it's been a minute since since we saw each other over think Realty in Tampa. How you bee? Aaron: Been very good man. Think Realty in Tampa seems like so long ago, because I've been to Tampa two times since then. Miami a couple of times. Literally, I don't get to see very much of anything. But seats 3d of American Airlines is what it seems like. Michael: And that's pretty close up to the front of that first class? Aaron: It's always first it's what I've discovered in my career, it used to be you know, you got to you got to hang on to your capital is really kind of dumb to spend money unnecessarily. But then I got to thinking. So like I said first a few times, and I sat next to some amazing people. So it's not about the seat. It's about the person next to you. And more often than not, it's often enough, let's put that I sat next to some people, just some amazing conversations that end up doing business with some people when they didn't want to talk to me. And then it wasn't long, they were talking to me. And then they're giving me pointers, one guy who was like one of the executives over at the Business Journal. And I was finally DC next year, he's telling me all the cool places to go in DC. And now I've seen him pop up online. And I'll check in with him to see what's going on just a really cool guy that I recognized him by couldn't place who he was, until I got in talking. And then I found figured out who he was. So it's just, that's the kind of person that I ended up sitting with. And it's more the conversation than anything. Michael: What a different way of thinking about things like so many people see the price of the ticket. They're like, Oh, I don't want to pay that or like the experience. But you're you're approaching with a whole different lens. I love it, man. Aaron: Well, it's kind of how I approach going out for an expensive dinner paying a big tip, things like that. It's like, we know what's happening with the dollar right? It's not doing a whole lot sitting in our bank account. And believe me, I agree with holding on to cash, I believe I agree with investing wisely. But I also agree with taking that capital and putting it someplace where you're building relationships and building up somebody else. And so there's times when somebody does a great job, man throwing $100 tip on a on $100 Dinner is not an uncommon thing in my world. And that's not me beating my chest. It's that person earned it and what's that 100 bucks going to do in my world? My wife will ---- it away on somebody Amazon, right? So it's really not going to, it's not going to enhance our lives that much. But you'd be amazed at what it does to that person. And you walk back in there to that place you think that person forgot you? Well, they definitely don't forget me with the braids. Michael: I was gonna say yeah, with a look like that. Yeah, Aaron: Yeah, that's remembered. But then they remember that. And then it's there's this, I talked about the economy of gratitude a lot, and that autonomy kicks in. And they will do more and go above and beyond. Of course, now you're kind of stuck to $100 Michael: That's the minimum, yeah, the bar has been set. Aaron: So you got to be careful of how often you do go back or when you go back, you'd be amazed at the interaction you have with this person. It's a life changing experience. Because our like our lives are changed by the people that we interact with. And not necessarily what what we what we grow in it or what we amass in it is the relationships that we have. Michael: I love it. I love it. Let's give people the quick and dirty of who you are and where you come from and what is it you're doing in real estate and then we'll jump into kind of the meat what I wanted to cover today. Aaron: Very cool. So the quick and dirty is not so quick and but it's kind of dirty. So the interesting thing I was sitting in an event happen to be in Tampa, we were just talking about Tampa. This was years ago and one of the main speakers there talked about the lending industry that being a loan officer and he said the reason people become a loan officers because they can't get a job doing anything else. And it rang really, really true to me because that was my story. You go back to you know, I grew up on a cattle ranch in high school and from there to work in the oil fields in Wyoming drove truck ran heavy equipment, found myself in the mines in northern New Mexico in the late 90s. And they started to shut down the project and so I got laid off and I thought no big deal. I'll find a job easy and I had a wife and kid back in Arizona and I was up in northern New Mexico I go back and forth, went back and I couldn't find a job for nothing. I tried like crazy everything I applied for I got this this statement of being overqualified. I kept getting turned down. And things were getting dire at that point, I needed to make something happen. And as I left to go apply for a $10 an hour truck driving job to me, it was like the worst thing I could possibly do, but it was gonna put, bring money so I can at least feed my family. My wife as I left gave me a coupon for free diapers. So I drove over to this place, I applied the general manager turned me down again said I was overqualified. So I'm 23 years old, I feel broken, and walking down to my truck up coming from the type one of those job site type trailers go down the stairs. Get on my truck, said a quick prayer. I was really just I was trying to hold back the tears started up my truck and I started pointing myself to this grocery store. Well, as I'm headed to the grocery store, my gas light comes on in my truck. I had never ran that thing long enough to find out how long ago on a gas light. So I quickly found a store that had a groat a gas station on the corner. I pulled up that pump, got my debit card out, I said a quick prayer, prayer, I swiped it and I got declined. So I rifle through my truck looking for a lost dollar, found a few coins, I closed it lock the door, I started walking that grocery store pocket parking lot. And as I'm looking around, you know, I would find something on the ground look, make sure nobody's looking, reach out quickly pick it up, put in my pocket. This went on for what seemed like a couple hours. And then I got enough change that I thought would give me a couple gallons of gas. Luckily, it was 97 were Yeah, 1997 I think gallon, a gallon, a gallon gas, like 89 cents. So I went and exchanged my change, which was a couple hours of my life for two gallons of gas, went into the grocery store with my coupon, found those diapers hurried up and went to the checkout counter. I don't know if you've ever been this position, but nothing feels worse to, in my opinion, to have one item and your coupon for that one item. Right. And now it was just another just another crappy feeling to the day. So I got my stuff put in the bag, and I'm screaming either as fast as I can. And somebody recognized me. He called me over and I didn't want to talk to anybody. But he asked me how things were. And I told him what I just told you. He goes, Let's go to dinner. I'm like, Dude, I can't afford dinner. And I hated saying that. He was no, no, no, I got a gift certificate to Red Lobster. I'll take you your wife out. So we went to Red Lobster a couple of nights later. And that's where he told me about the mortgage industry. He explained to me what happened in it? And I'm like, Dude, how can I do this? I know nothing about that. I think there's numbers involved, and I cheated my butt off to get that C in high school. If it wasn't for the fact that could pick a lock, I would not have graduated. So I went in, I cut a foot off of my hair, I shaved. My mom bought me some business likes clothes, and I wouldn't do an interview. And they started me as a telemarketer in 1997. So that's how I got going. So going from a telemarketer to working actually some of my own leads to building this up and going through the crash and all kinds of stuff. And there's a bunch of stories in there. To now, you know, I was just called by an outfit by modex. And they recognize me I think is the number six guy in the United States. For transactions closed. I was number one guy in Arizona, I didn't even realize that I didn't really pay attention to the statistics, there's 1.6 million people in United States that do what I do. And from what I can tell, I'm ranked number six for how many deals I closed last year. So it's kind of an interesting dynamic to consider that swing. Michael: Yeah, I'll say, Well, you know, congratulations on how you've come clearly a long way. That's really exciting. Aaron: Well, thank you. And there is campfire story after a campfire story of of the different things we'll probably talk about this in the series of stuff we talking about the beatings that a person takes to become successful. And you don't what's really interesting is people say, How do you get there? How do you how do you achieve success? Mike, I'll let you know when I do. Because you just don't feel like it all the time. It's a consistent grind. You're always trying to be ahead of the head of everybody else. And once you achieve something, it's way harder to keep it. Michael: Yeah, I think people think it's like this just flat curve, you know, flat line once you've achieved something, but really, it's very sinusoidal. It's up and down and valleys and troughs. And you're like, man, some days suck. And some days are great, but the like, I think it's about the end destination right? Where you're trying to get to Aaron: 100%. So I look at it like Everest, right? You get up there. And I don't know, if you've ever really paid attention. Maybe you've climbed the same for all I know, but how long a person sits on top of Everest, it's a matter of minutes, and they're getting back down because that sucker will kill you. You know, and so it's it's just like any other achievement, we get the second you sit back and you relax and put your feet up. It's gonna kill you. You need to keep moving, you got to get down, you got to get to the next Everest. And it can be debilitating to think that we're constantly hunting the next goal. The next goal, the next goal, instead of just finding the happiness, you know, and you our viewers know who Larry Yatch is he says, you know, success is a optimized daily experience consistently achievable, right, something to that effect there are and so and it's sustainable over time. Yeah. I gotta find that optimized daily experience. Here's what I got to do. I don't think I've achieved finding that yet. Michael: I'm right there with you, man. We're in the hunt together. Aaron: Yes. And we'll keep hunting and maybe we'll keep communicating about one of these days. You're like, Dude, I found it. Michael: Yes. let me show you. So, let's shift gears here a little bit and talk about a topic that I think is on everyone's mind. And that's inflation. And you're working in the mortgage industry for a long time, you've seen a lot of ups and downs, sideways lifts, REITs give us a little bit of insight into why is inflation being talked about so much? And what do we as investors need to be cognizant of, and either using it or being abused by it. Aaron: So inflation is definitely an interesting animal. And it's talked about a lot, everybody is talking about this constantly. And what I point a lot of people to just even understand inflation is go to a place called Shadowstats.com. When you go to shadow stats, you're gonna go to, and I always encourage everybody to get log into it get to pay for the 100 bucks for the year, whatever, you're gonna go over to alternate data, you're gonna scroll down to inflation, you're going to find this chart, and what this chart has, it's going to be going to show you from 19, from the early 1980s, up until now, and it's going to have two different lines, a blue line and a red line. And they're going to be, they're going to be diverging at some point, they're gonna stay together at one point, they're gonna go down to when they show inflation started work its way down, and then they start to kind of break apart. And what you're watching there is the federal funds rate itself, or not the federal funds rate, but the CPI that the Fed tends to track, and it's what they have changed the index to contain. Right? So you're familiar with the Dow and the NYSC. And the and the NASDAQ, right? s&p, right, the s&p, none of them have the exact same value Correct. They're all different because they have things in them. Well, if you didn't get into, if you look at the the CPI, the Consumer Price Index, they will stack certain things in there that they can manipulate with monetary policy. And that's what they'll go off of. And you can see in this chart, that it's going to show that that that red line is skipping across the bottom right around their 2% Mark quite a bit, and then it spikes up to about eight and a half 9%, which is where we've been at recently. But if you look at the real rate of inflation, which is the shadow statline, it's going to be pushing up closer to 17. Why is that? Well, because back in the 80s, they took everything into account, what is the person really literally spending money on to on their day to day life, and they're going to track it so they can see how much their life is changing year over year as far as their expenses. But then they wait a minute, it's getting out of hand, because what we do to pass the law for will increase their their benefits or their social security and the retirement benefits to the rate of inflation. Well, we need to keep this to 2%. Right. So we don't want to raise that really, really quick. That's where you start seeing this particular manipulation? Well, if we're looking at 17%, people should really, really, really be concerned about what's happening with their dollar, because what's the dollar value doing with inflation? Michael: Decreasing. Aaron: Decreasing, right? It doesn't spend as far. So what I like to do is talk about this in the sense that it's always been that way. And when we're talking about real estate investing, you know, the, in my opinion, where a person does best when it comes to real estate investing is leveraging the property, you know, the way to leverage the properties, get some sort of financing instrument on it, if you're gonna get financing on it, you want to get it for as long as you possibly can. Because at that point, the longer you take a pay, the less you actually pay, because the dollar you're paying it with is worth less and less and less every year. So I know in today's higher rate environment, we're talking about inflation is pushing interest rates up. And if you look back at the history of inflation, last time, we saw inflation of this, this magnitude, you'll see in some charts that will show the history of inflation, and how it's somewhere right around 20%. But then you can see the history of the interest rates and the interest rates were closer to the same 17-18% for a 30 year fixed. Well, if we're where we are, as far as inflation is concerned, actually inflation was right around this 13 to 15%, where we are today. And then we're talking to interest rates at 19%. Well, the federal funds rate achieved over 20% at that timeframe. We're not there right now. So explain to people is the gap that we have there as a gift. Right now we're seeing somewhere in the sevens for 30 year fixed interest rates. And that's, you know, we're talking about this in October, the 2022. Do I expect it to get higher that I really do because of all the uncertainty within the market. But if you've locked it in and that interest rate for 30 years, and inflation stays consistently higher than that, you're never even going to pay back what you borrowed. In fact, I have an app to prove that, you know, people want to go to just go to my website, shoot me a message, I'll get you the app. And you can download this thing on your phone. And you can calculate your amortization table and then see what inflation did and how you paid less than what you borrowed over a 30 year window even though you're paying higher interest in what you hoped. Michael: We have to come back to that point because that's so counterintuitive and the exact opposite of what everyone tells you. When you look at the sum total you paid over a mortgage. But before we get there, I want to ask is it appropriate to look purely at The rate of inflation against interest rates? Or do we also have to take into account just the pure purchase price that we're seeing today? Or is it become irrelevant? Aaron: I think they're all a factor. Because sometimes when you're let's look back at interest rates go backwards a year, right? Interest rates were in the threes and fours were people buying investment properties. Unbelievable, we'd never actually seen that, and never thought that I would ever see that. But what's happened to the prices of houses, what what you're doing is you're opening up where they were, they say the affordability index had a right how that worked in and more people could afford houses. Well, the more people that could afford houses, the more people bidding on those houses, right, the more of those houses got bid up beyond their real value, price does not equal value in an environment like that people are just willing to pay an enormous amount of money. Well, because of that, all that affordability, it was so so called built into it because of lower interest rate was getting eroded by the fact that pushing the price so high. So now we're at this really interesting point where the prices are still fairly high compared to, to the, I'd say the real value of real estate because of what people are willing to pay. But our interest rates have increased to not quite to the highest it could and it's really not as high as the national as the average has been since 1971. But it's going to slow that down, I think an equilibrium equilibrium is going to kick in here at some point. And you might see those prices start to decrease a bit. And then of course, it's going to make a little bit more sense. So there's going to be people sitting on the side and waiting and watching. But then again, are they going to increase or decrease that much this begs the other question, were five point I think 5.2 million units short to fulfill the needs of that for housing United States. And then you're we're already short on that. We don't have as many building permits happening. We don't have the supply chain we used to, and now we have how many houses just got wiped out in Florida, you start compounding all this out, man. I'm telling people if you're in a contract, you probably want to stay in that thing. Because if you're backing out of a contract, because you don't like the price, you don't like the rates. Expect, just imagine what you're gonna like and a year from now, I don't think it's gonna get prettier. Michael: Yeah. Yeah, that's really interesting perspective. Let's come back to what you said before about, when you look at the total amount you've paid. Over time, it actually ends up being less than the original amount you borrowed because of inflation. Walk us through that again, Aaron: Gladly. And you're probably have to say that a lot to our conversation. Let's go back. You start with a topic. And now I go 100 different ways, because my mind is one, obviously, beautiful mind. There's a dude in here.. just just see it. So you've got. So when you think about our inflation, right, now, let's just take the BS metric that the feds throwing out there eight point, I think we're at 8.63%, if I remember correctly, right. So 8.3%, that means the dollar is losing 8.3% of its value every year. So if you take 8.3%, I'm gonna get my calculator out here on my phone. And we're going to divide that by 12. That means we're losing .691 percent of the value every single month. Is that not alarming .619% of the value every single month. So that's pretty well. So what I have here, and I'm just going to launch my launch my my app here, and anybody can get it is to QJO investment tool, you can go right to the app store and get the QJO investment tool. They may bleep me out here, guys, but it stands for the quit ------- off investment tool, because I think that's all a person does when they're so worried about interest rates. So if we're doing say, a 20%, down on a $200,000 property, and you're putting, let's say it's a seven half percent interest rate, you're gonna have a payment of a principal and interest of $1,118.74. Not real bad, right? But now you're gonna pay over that period of time on that interest, you're gonna pay $402,747.56, right? 402K. You got a $200,000 house, you put 20% down, that's $160,000 loan. Right? And then you're going to pay $400,000 In principal and interest people like there's no way in hell, I'm going to do that. But when you recalculate, every time you make a payment, that payment is worth what did we say? Point six 9%? Less? So I'll write $6.90 per dollar. Last, is that right? Or is that? No, that's not quite right. It's eight, it'd be eight cents per dollar per year. So it's point 06 cents per mile. Right? Right. But when you per dollar when you recalculate that every time for 360 months, the actual inflation adjusted payment over 360 months is $152,466. That's less than what you borrowed and that's based on 8% inflation, just 8% Because you think about that the dollar you're borrowing is seven and a half percent. You're paying a Back at an 8% decline, right now it's bigger than it's 8.3 8.4%. In fact, if you want to look at shadow stats, if you look all the way back, when you look how they track it, it's been over 8% since 2012. So in reality, you're never paying back what you borrowed because you're paying less them what they're getting in the form of interest. You're paying, you're literally getting paid to hold their money. And what's really, really cool about this is where it gets awesome. Because of inflation, we get to raise rents, how much are rents going up year over year right now in the United States? Michael: Like seven to 10%. Aaron: Last time I saw it was 12. Right? When you average it all out? Dang. Yeah. To a fact, Michael: I haven't looked for a while. Clearly, Aaron: Property manager in Kansas City. I had him check it out. They ran their books, they figured they said there was like 14.2, we looked at the last year, Mike, wow, this is crazy. I'm looking at what my kids are paying right there. They're in these apartments, and they're bumping up two to $300 every year. To me, it's kind of immoral. Now I get there's costs go up, taxes go up, upkeep goes up, because you got you got supply chain issues, right? You've got workers, the man ain't fixing anything over there really fast. So it's not like I think that they're, they're hurting themselves. From what I'm hearing, right? They're staying in my house now. And again, because of the darn AC has out for a couple of days. Those kinds of things. So when you think about that, what's going on in that type of environment, they're raising it like that? Well, let's see what I always tell people, we get to raise rents, even at just 5%. That's every time you raise rents, that's a compound on the previous year's rent, and then you compound it again and compounded again. So as you're compounding the increase in your income, you're compounding the decrease in what the lender makes, because they don't get to raise the payment because of inflation. So eventually, it may suck for the first 2-3-4 years because of your start rate. And because of all that, and you know, people always like to use cash on cash return is their metric. I think it's a BS metric. Guys, that's not that's not ratio, focus. There's other places to focus, we'll talk about it. But when you start adding that up, and really, really working out the math on it over time, you start killing it at about years 5-6-7 And just compounds huge. Those who don't want to be able to hang for the first three to four years of the ones going to be off on the sidelines. And they're the ones going to say that real estate's not the place to be because of interest rates will they're the they're the the people in the crowd. They're the ones that are the spectators, that people on the field, know where it's supposed to be at and they understand it. And those are the ones going to take opportunity. Michael: Love it. Aaron, let me ask you this, the Fed has tried to maintain inflation at around two to 3% annually. Right now we're up in that eight plus range. And so we did the math behind if inflation stays there for the duration of the 30 years that you're holding that loan. But if they get things under control, and it drops back down at 3%. I mean, did all of that benefit just get eroded? Aaron: Well, we also have to look at what they're dropping by 3% They're dropping their index by 3%. And that's dropping the real rate of inflation by India by 3%. So I don't see that as being eroded because you look back at you know, go back to shadow stats, start looking at what they were they calculate real rate of inflation. We've been over 8% Since what since 2012. You have a consistent increase in inflation, it's going consistently up cost of living has not gotten cheaper. Now, I don't know when you were born, but in 19 in the 1980s I could jump on my, it was the late 80s I could jump on my skateboard my mom gave me $1 Literally $1 Bill, I could go down to the corner store, get a gallon of milk, buy some candy for me and bring change to her. how possible is that right now? Michael: Um no, can't even buy the candy for the dollar right now? No, I just bought a KitKat for a buck. 75 Check it out. That's ridiculous. Dude, it's this dark chocolate and mint. KitKat I'm like such a sucker for dark chocolate. It was amazing. But yeah, Buck 75. Aaron: Well, it's probably probably an extra 10 cents for the blend, right? But, but again, kefir dollar 75. So that's what I'm saying a gallon of milk and I could get into it. It wasn't like the big jumbo candy bar, nut it was something. And I brought that change. But that was possible in like 1986, I think is when that was okay. It feels like a little while ago, but it shouldn't have changed that much. But it did. So if you look back at that's not a 2% inflation increase. That's common. That's some serious increase, especially the price of milk today. Right. So we started looking at that the Fed has never really kept it under 2% control. The other thing is, is our inflation today, I don't know if we're really know the full outcome of what's going to happen with what they did with those printed dollars. They have put $8.9 trillion into the markets that they never were in before. If you look at their holdings with respect to mortgage backed securities and treasuries, $8.9 trillion. Then we have they backed off by point zero 2 trillion. And now we have interest rates more than double what happens when they back off by half. Right? So when you start thinking about what they did, and what we're that we're the the amount of money that's in circulation, there's got to be some really massive moves here to get this under control and One of the things that really kind of stands out to me and if you heard this conversation were Powell, the chairman of the Fed was speaking. One of the things he said, I don't remember the exact words. He says one thing we've learned about inflation is we know very little about inflation. That's alarming. Michael: Yeah, big time. Aaron: And that was said within the last 45 days, I think 45 to 60 days. So what I am taking by that is inflation. There's this big loaded oil tanker, right, and it's headed towards ground right now. And they didn't get off the throttle early enough with all the stuff they're doing. Now. They're dropping all these anchors, they're hooking up tugboats. They're doing everything think everything they can, but it's too, it's too late. It's going to run aground. And what that happens when it runs aground, I don't know. But it's going to be pretty ugly. And so that's why I tell everybody I'm dealing with, you need to control what you can control for as long as you can control it. And the one thing we can control right now is a 30 year fixed loan. An ARM, Are these things they call, what did they call this thing be all in one loans, it's an adjustable rate, just a single adjustable rate, kind of a credit line? Yeah, great concept. But we have no idea how it's going to react in an environment like this. So for me, it's like whatever you can do to maintain it and keep control of it. And then when you know, we know for a fact that sense right now to close on this 30 year fixed and pay the points and get the rate. But what I do know is you're not going to pay it back, you're gonna pay less than what you borrowed. When you go with what the bank say, let's go with a five year or seven year, you have to do something with that loan, at some point. What did you just become a new client for the banks, that's what they want. That's what they say in the background, sell the arm because you're insuring your business for the future, the business for who the loan originator, not the person buying houses to rent out and to maintain a business, you are now become somebody's servant, you become a business, somebody else's future, you're a commodity. And I try and tell her but don't become somebody else's commodity control it for as long as you can. Only pull refinances, you can pull the money back out and reinvest into other things. Other than that, let that sucker sit there as long as you can run that out and let somebody else pay the freight. Michael: Yeah, that makes a ton of sense. Aaron, I know you deal exclusively in residential mortgages. But can you give any insight into why the commercial markets only have 5- 7-10 year options on their mortgages, as opposed to the 30? year fixed? I mean, I have seen a 30 year fixed, but it's not the Colt 45, like it is in the residential space? Aaron: Yes, you're right. It's it's very, very uncommon. Well, because most your commercial mortgages have to be made up by by investor capital or by banks, right. And so banks are going to take depositor capital, and they're going to create this or they're going to create their own type of security. And they're going to be able to get investors come into most investors don't want to let their money sit for 30 years. Most people don't know that when you're letting your money sit for 30 years in an inflationary environment, you're not getting your money, right, we all expect a certain rate of return on if you do any sort of hard money lending. Or if you've ever done anything to that effect, or fix and flips, you're going to calculate your return on investment annually. And I searched for a 12 plus. Right. And I don't know if you listen to Warren Buffett, Warren Buffett was talking about where, you know, some lady came to him. And, you know, she was trying to figure out how to how to invest her money, and it was a lot of money to her, but not to him. And he said, we have any credit cards? And she goes well, yeah. And he goes, we'll pay that off first. Because why would I do that? I'm not making any money. He goes, What are you paying your interest? 18 20% Because I can't make 18%. So I was I don't know how to do that. So get rid of the debt, you know, then I can show you how to make at least 12 to 13. So that's what we all are wanting is get that 12 13%. You're not going to make that in a 30 year fixed, you just aren't. So what we've had we've we've created a way to kind of subsidized by the system. And we've got this Fannie Mae or Freddie Mac. And what they did was they created the mortgage backed securities, luminary did that for anybody who watched the The Big Short. And if you haven't actually watch it. I know this is a family family show. So don't let the kids in there when you watch it, but it explains the history of the mortgage back series security, where it came from. And now what you have is now a tradable piece of paper that people keep just trading around. That's where its value is. Its value is in its trade ability in its liquid tradability as well as the fact that it the performance of the note people making the payments on time. That's what makes that's a valuable piece of paper, not to sit and hold it for 30 years. It's not valuable at all, you're losing money on that paper. So that's why I think in the commercial world because they have not had this initiative from the from the government say we need to create housing or we need to create people's businesses, right. They didn't have that initiative. They had the initiative when you create housing, when you give people opportunity to live in a home when you give them the best opportunity and mortgage financing. So they created a 30 year fixed and a 30 year fixed has caught hold and become kind of the gold standard is now the the the Qualified Mortgage, if you will, when you get into anything else. So those where you're not really a qualified loan, you don't have safe harbor from the government or do anything outside of that. So that's about my best guess is you can't get anybody to want to put money up for that long for so cheap and lose it, and just and not make a return is really what it boils down to. They probably just rather own the building. Michael: Yep. Yeah, that makes sense. That makes sense. Aaron, one final question before you before I let you out of here 15 year fixed versus 30 year fixed, you'll often see a pretty big spread on the interest rate. Does it ever make sense? Aaron: We're not seeing as big a spread now as we used to. But here's where I look, it used to be a bigger spread. It's not real big right now, if there is a spread at all. So and one, two reasons we're not seeing as big a spread as we used to, we have a lot of uncertainty in the labor market right now. And as a result, that uncertainty lenders like I don't know, if I want to saddle somebody with a bigger payment, when they may have a an issue with their income in the near future. And if they do have an issue with their income, what is their ability to pay this higher payment versus a 30 year fixed, so we're gonna price it in a way that kind of leads them back to good old fashioned 30 year fixed, because our value in our portfolio is them being able to make their payment. So then when you do compare them side by side, even if it's a lower payment, you can use my, you can't use my calculator, I don't have that feature in this, we will in a future iteration, by run the numbers, when you're paying off a 15 year fixed, even at a three eighths of a percent lower interest rate or even a half, I have found you actually pay more in actual dollars. The reason being you're paying those dollars while they're worth more, rather than stretching out over time when they're worth less, because in 15 years, they're going to be worth a hell of a lot less than they are within the first 15 years. So those who pay that off quick like that, yeah, feels good. You're getting equity in your house and all that kind of stuff. I'm of the mindset pay the 30 year fixed stretch as far as I can take the extra money I would have paid for 15 and reinvested somewhere else. And as a result of being able to do that multiple different properties and compound it that way I'll generate a lot more wealth. Because when you have when you have a home and I tell people if you're gonna buy real estate investments and get those those single families, duplex, triplex, fourplex, you have two jobs, right, you have to pick the right people to work with on the real estate side. And on the lending side to understand what you're trying to do and will guide you not try and lead you to make them money but lead you to make you money, and then pick the right asset to buy the stays reasonably rent it for the entire time you own it, you can raise rents, if you have that, who pays off the mortgage? Michael: The tenants, Aaron: the tenant, so if the tenant pays it off, and it's easy to do the math, guys just take 100,000, let's say it's 100? Well, you have to say it's an 80,000, or only about 100,000, our house with 20%, down, you got an $80,000 loan, you divide that up by 30, which is how many years are taken to pay it off, you'll find that it pays off. They're all they're basically giving you $2,666.67 per year, they're giving that to you, right, and that's what you're paying off the mortgage with? Well, you divide that into your investment, which is the money you invested 20,000 plus a 6000 in closing costs as 26,000 your investments grown by 10.25%, every year, do the math, you figure it out yourself. If they're paying it off, you did your job. And that's all you made was done paying off the loan, you made no more cash flow, you put no more out of your pocket, that's 10.25%, predictable, you still have the tax benefits, you still have the appreciation on the home. So that's before all, all cash flow. So what I tell everybody is let that drag out, it doesn't matter what you do, if you do it on a 15 year note, you're more than likely have to go to your pocket, you're more than likely have to try and maintain that in other ways. And if you're out of a tenant for a month or two, that's really going to hurt your pocket, stretch that thing out. If you really feel like you want to get it paid off 10 years you can all in 15 years, you can always pay a 30 like a 15 You can never pay a 15 like a 30. Michael: Yeah, it's very I always tell people to there you have the optionality with 30 year and that you don't have the 15. Arron: Options or everything. You know, that's all people want is to be able to make a decision for themselves. But when you pitch and you back yourself in the corner, and you're not allowed to decide for yourself, that's when you're frustrated, that's when you get angry, leave yourself out. It's a good business move to leave yourself out. The other thing of it is going back to the to the arms these other stuff, man, we're going off of hope. And hope is not a good business strategy. You need to go off of what you know and stick with what you know and control for long as you possibly can. Michael: Love it. And this is an awesome place to put us pause until our next conversation. Until then, where can people find out more about you reach out to you if they have questions or want to reach out to you for your services? Aaron: Best Places go to AaronChapman.com If you can't find me there because sometimes there are some some browsers don't like it you have to type in Aaron B chapman.com. Just type in Aaron Chapman a Google if you find a bearded redneck lender you found him. Michael: Right on. Right on. Well, hey, thanks a lot, man for hanging out with me and walking us through this really kind of tumultuous time appreciate you. And we'll definitely be chatting again soon. Aaron: It was my pleasure brother. And again, thanks for letting me under to poke some holes in in people's heads out there. Michael: All right, everyone. That was our episode A big thank you to Aaron for coming on and dropping some really interesting Insights for us on where we're headed in the market. As always, if you enjoyed the episode, feel free to leave us a rating or review and we look forward to seeing the next one. Happy investing

united states amazon google walk miami arizona dc bs dinner kansas city new mexico tampa guys wyoming mount everest ac fed buck powell profits arm correct warren buffett unbelievable interest rates nasdaq dang american airlines cpi dow realty big short kit kat reits red lobster fannie mae freddie mac consumer price index business journal nysc aaron chapman real estate today roofstock aaron b think realty michael yeah michael love larry yatch michael yes shadowstats aaron it aaron yeah michael all aaron yes aaron well aaron so

The full story of REITs and fractional ownership with Daria Davydenko

Play Episode Listen Later Oct 15, 2022 29:51

Daria Davydenko is a Securities Sales and Operations Specialist at Roofstock where she supports Roofstock's fractional ownership product, Roofstock One. Prior to that, Daria served as Vice President at Goldman Sachs. Her background in finance provides her with a unique view of financial markets and risk management. In this episode, Daria walks us through the history of public and private REITs, and who might be a good fit for investing in them. Additionally, she covers Roofstock's exciting new investment, Roofstock One, a fractional ownership option for accredited investors. Episode Link: https://www.roofstock.com/one --- Transcript Before we get into the episode, this podcast is intended for general informational purposes only and is not financial, investment, or tax advice. The information provided is not directed toward any investor or category of investors and is provided solely as general information products and services or to provide general investment education. Nothing in this podcast should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product. Michael: What's going on everyone? Welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum and today with me, I have Daria Davydenko, who is our sales and operations lead for Roofstock One and she's going to be talking to us about the history of public and private REITs really what they are, and who might be a good fit for investing in them. So let's get into it. Daria, what's going on? Welcome back to the podcast. Great to have you back. Daria: Hey, Michael, good to see you again. Thank you for having me. Michael: Yeah, my pleasure, my pleasure. Great to see you again. So today, we're talking about a really cool offering Roofstock has Roofstock One. Can you give us a really quick insight into what that is and then I would love if you could help walk us through kind of the history of REITs in this product and how it came to be? Daria: Yeah, sure. So Roofstock One is a relatively new offering that we have as part of all of the different products use that we have on roofstock.com. Roofstock One is structured as a private REIT. So one of the benefits of investing in Roofstock One is if you invest in real rental properties, you have the benefit of knowing exactly what your own. While it is a nice benefit, generally, it's not available to visit more passive real estate investments like REITs, public or private. However, we made Roofstock One different, even though it is structured as a private REIT. It is a fully transparent and customizable. So you know exactly what your own by buying a share of Roofstock One. So it is the first of its kind single family rental rate that's transparent and somewhat customizable to investors. Michael: Awesome. All right. Well, we're definitely gonna dig more into that here in a little bit. But I would love if you could give us again, a kind of a background, like what is a REIT? How did we get here public versus private, bring us up to speed. Daria: Yeah, so actually, what so REITs have a very interesting history, that I don't think a lot of people realize how the first I guess, you know, private equity firms have emerged, and then how can a REIT structure was created. So back in the 1980s, investors were mainly individuals and they were kind of using real estate to kind of harvest losses and shelter profits. So that was kind of the main reason why people were investing in real estate and also in the 80s, there was something that was called S and L. That they were created by the Federal Home Loan Bank act of 1932. They were like Savings and Loan Banks that basically had some caps on interest rates on deposits and loans, and but they were able to basically lend money to those individuals so they can buy real estate. Now, obviously, in the 80s, we all know that there was a recession and so because of the restrictions that were placed, placed on this SML banks, you know, because they had some caps on interest rates on deposits and loans, it greatly limited their ability to compete with other lenders as the economy slowed and inflation took hold and so for instance, as savers spelled money into the newly created money market funds that were yielding, like a much higher interest rates, like SNL just could not compete with those traditional banks due to their kind of lending restrictions and so when you add the recession of what happened is because the recession was sparked by the high interest rates that were set by the Fed in an effort to end the double digit inflation, which is kind of what we are kind of seeing right now, nowadays. So now we're left with little, you know, little more than, you know, kinda like a dwindling portfolio of low interest rate mortgage loans and so obviously, their revenue stream, you know, were severely tightened and so in the 1986, Reagan changed the law and then this indication was, you know, basically it was no longer working and there was no longer like the tax loss harvesting that was allowed in real estate, that can actually cause a real estate values to crater because a lot of people did not see any value of investing, I guess, are holding real estate anymore and so that actually caused SNL crisis and so I think a lot of people don't realize but during the SNL crisis, there were like 8000 banks that have failed. So, because of this, yeah, because of this kind of crisis that happened. I mean, this was like the largest crisis, you know, since the largest collapse of US financial institutions since the Great Depression. And so like that, that kind of happened in the 1986 and so what happened, right, so once there's no kind of crisis happened, the government had to step in. So while they found that there was a lot of highly levered foreclosed personnel that owned a lot of real estate, and so government inadvertently owned those banks, and so they end up owning hundreds and 1000s of properties. What happened next is they have created something that's called the Resolution Trust Corporation, that basically became a property manager. So there sole purpose was to own and dispose of those distressed assets. So Resolution Trust Corporation or short, RTC was a temporary federal agency. So basically, from the 89, to the 95. You know, they largely were trying to kind of resolve this SNL crisis that happened in the 1980s, they, you know, they were basically like trying to do some property management, cleanup, what kind of what was left behind and another, I guess, purpose or creation, the RTC was to dispose of this assets. Now, the government wants to sell a lot of assets and so they need to have, you know, it's going to be highly inefficient for them to find like a single bar and buy, like, you know, who can just buy like a single property. So what they had to do is they had to figure out how to find a pooled vehicle that can just come in and buy this pooled kind of assets and so that's when the first private equity firms were created, who kind of came in, they were able to kind of pull financing, and then kind of buy like large amounts of this kind of real estate that was left behind after the SNL crisis. So that's where kind of their real estate or you know, kind of private equity investment was created. That's kind of the history of it. Now, the real estate investment trusts were a way for individual investors or intervene institution investors to get exposure to real estate without kind of having to go through, like active management of the underlying real estate. So Real Estate Investment Trust was a way to, for you to get exposure to, you know, real estate as a class. But you don't, you don't have to kind of forego, like, you know, the whole kind of financing closing, you know, property management aspect of it, while still enjoying the benefits of getting dividend distributions from the rental income, you know, the appreciation of the properties, etc. and then, in addition to that kind of REITs were created to encourage investors to get into the real estate market, and also get some kind of tax benefits from it. Now, I know I spoke a lot. So I just want to make sure I, you know, there's any questions that I can answer for you, Michael. Michael: This is super interesting. I mean, one thing that terrifies me is this idea of government, governmental property management, that just would have been an absolute nightmare, because we all know how that probably worked out. But no, I think that makes a ton of sense and so the so these private equity firms were created to buy all of the hundreds of 1000s of distressed assets that the government ended up owning because of the collapse and the financial crisis. But so maybe, help me understand what a REIT is, like, is a REIT a share of the private equity company that then owns these properties, is that how that works? Daria: Yeah, so REIT is basically like a pooled vehicle, you can imagine that, you know, let's say, like, just as a simple example, let's say you, Michael, you own kind of 10 different properties and you would like to allow other, you know, investors to kind of participate in ownership of those properties. You know, you can package them basically into a read. Of course, this is more complex than kind of what I'm describing, but in the simple terms, you can package it into the REIT and sell basically shares of the three to other investors who can get economic benefits of kind of owning 10 of those properties. REIT like many companies, they distribute earnings to investors in the form of dividends, unlike many companies have a REIT incomes are not taxed at the corporate level. So kind of that means that REITs are actually they avoid the double taxation of corporate tax and personal income tax. So instead REITs are sheltered from the corporate taxes so their investors are only taxed once and this is a major reason why investors value REITs over you know, other dividend paying kind of structures out there. Another benefit of REITs I guess, that they were created is that they're widely used because they're highly for favorable tax advantages are REITs are required to distribute 90% of their earnings to investors and so that kind of like allows them to avoid the double taxation that I mentioned previously and so this benefit kind of trickles down to all the underlying investors, you know, they're not being double taxed, and they can receive the maximum amount of capital from rate, I guess another advantage, I mean, we all know that investing in real estate, one of the biggest advantages of is the depreciation. So depreciation can be passed through to individual investors, even in a REIT structure, basically, you because you get to offset your income is a depreciation kind of tax deduction. Let's say you might be earning tax dollars, that $10 per share, but you only will be paying like $7 as an example, paying taxes on the $7 of those earnings and in addition to that, if you're kind of holding your shares, for longer than a year, you will be paying the long term capital gains taxes, which is kind of much lower than your ordinary income tax. There was another kind, I guess, good, good question that you raised Michael, about what is the difference between private and public REITs, the main difference is private REITs are less liquid, you know, compared to public REITs, public REITs are the ones that are being traded on the public stock exchange and so you're basically kind of they're just like stocks, you can buy them and you can sell them and you will also be getting the dividends while private REITs they're not being traded on the public stock market and so hence, they're being sought after as like a less liquid option for you to own real estate. But at the same time, they're less volatile, obviously, because they're not subject to all of the changes that are happening in the public markets. So you just kind of there's just some kind of major differences, right? The liquidity but you know, because you're foregoing the liquidity, you're obviously getting less of like volatility in the stock price of your, you know, under the ownership of the shares of the REIT. So that's kind of the major kind of difference between public and private REITs. Michael: Okay. Yeah, that makes a ton of sense. Thanks for walking me through that. I guess the question that gets begged next is the Roofstock has been a marketplace for transacting on single family homes for years now. Why, like, why is this product coming about? Who is it designed to serve and who might not be a good fit for? Daria: No, that's an excellent question. I think we what we have found as we've been speaking with investors who come to the roofstock.com website and who really enjoy owning kind of real estate and single family rental properties, in particular, one of the feedbacks we have been receiving from investors is that they are some of them you know, obviously, if you want to buy properties outright, you are getting, you know, there is like a large deposit, I guess, that you have to put to buy a property, there is a financing, there is like a very long process of kind of closing, the Roofstock does a very good job at making sure that we simplify this process for investors. So we tried to make it as simple and as friendly as possible. But still, there are multiple steps for you to close on a single property. But obviously, you will be kind of subject to that single asset race grade, if you are only owning a single property you will kind of whatever happens with this property, it will kind of great greatly affect your cash flow, now we have created Roofstock One because investors have been basically asking us, hey, I really can enjoy single family rental investing, but I'm still kind of trying to learn the space and understand how it works. I've never owned single family rentals before and so kind of I'd like to dip my toes into this asset class and so I think Roofstock One kind of offers this perfect opportunity for somebody to own this exposure to this asset class, single family rentals, while you know being completely passive, so meaning you don't need to go through the kind of the whole process of closing on the property, finding the financing, you know, finding the property manager, we do all of that for you. You just kind of buy the share of stock one REIT you get exposure to this particular asset class and then kind of get, you know, potentially get quarterly dividends from the rental income and kind of just learn a little bit about single family rentals, how it works, how you know how you receive the dividends and gonna get accustomed to kind of owning single family rental asset class, where we have seen as there are, you know, some investors who really enjoy kind of being actively involved in the day to day of managing properties because you get this kind of owner exposure means that some people really like and so for those people, maybe Roofstock One might be a little bit too hands off and so they might kind of prefer to do like the direct ownership of the property. But there are also like a certain subset of individuals who just don't have the time to, like, investigate and spend time with property management companies and figure out like, you know, if they should increase the rent, or drop the rent, just kind of just to find tenants for the house, or should they kind of, I don't know, change the roof, or change the water heater in a property or wait for another month or two. So it kind of… Michael: All the operational stuff… Daria: All the operational stuff, all of this kind of micro decisions that you kind of don't realize, but they do pile up and they do take a little bit of your time. So you know, some, some of those individuals are like, Look, I just want an exposure to this particular asset class, I want it to be passive, I really enjoy it, I think, you know, I believe in single family rental, kind of asset class in particular and so, you know, this is like, a perfect way for me to get a passive exposure, while still kind of feeling like I'm owning some, you know, underlying properties and we try to kind of make it as transparent as possible to investors, so they actually can see, you know, what properties are inside, you know, Roofstock, one reads, so they can understand, you know, what homes, kind of their tracking the economic performance of, and so they're still kind of getting the feeling of like, okay, with this share, I potentially can own 10 to 20 you know, how many properties they would like, still kind of feel like they're owning those properties. But you know, they don't have to spend as much time on the operation or day to day stuff. So yeah, that's kind of the major reason why we have created the Roofstock One is just to serve certain subset of our investors that we have seen come through roofstock.com website and, you know, obviously, there is absolutely still a lot of kind of benefit of owning the properties outright. But there's also like, you know, there's just a time kind of aspect that's involved in it as well. Michael: Yeah, that makes a ton of sense and you said something about, for those people that are still learning want to dip their toes into the water, Roofstock One might be a good fit. But if I'm thinking about like a traditional REIT, I can go buy it on the stock market, I buy a share of it. I don't hear from anyone, I don't know what's going on in the day, like, I have zero insight into this. Is that different with Roofstock One like can someone truly expect to learn a little bit about what it's like to own single family rentals with roof stock one, or is it going to be just as hands off in passive and kind of, at a distance, like a traditional route would be? Daria: I'd say it's somewhere in the middle. So I mean, it is just as hands off and passive. But I guess the major benefit is in public creeds, I guess it's a little bit more of like a pooled vehicle. So just by buying a share of like a public REIT, let's say, for example, that there are like 60, and 1000 properties that are public REIT owns. Now they can be in different like various markets, right. So there could be across many different states in the United States and so you kind of get exposure to all of those kind of little, you know, properties a little bit. So Roofstock One allows you to be a little bit more targeted, if you wish to do so, we have something that's kind of cool, called like a tracking stock, which is like a mini portfolio of subset of properties. So let's say if you're interested in a certain region in the US, just as an example, let's say Georgia, because you believe in this region, or maybe you have invested in this region before, you can get exposure only to the properties in Georgia instead of kind of getting the exposure to all of the properties inside the Roofstock One. But at the same time, if you don't have anything, you know, any convictions and you just kind of enjoy single family rental kind of asset class and you just want to have diversification, then you can also just kind of do that and you can just by exposure to all of the properties inside the restock one read. So we kind of just provide like an ultimate flexibility of investors coming in and kind of creating their own journey. Almost like a custom rate, create your own custom read… Michael: The subway sandwich of REITs… Daria: Exactly. Yeah, it's like a Subway sandwich. You're correct. Yeah, that just you know, you choose whatever you want, like and you can even choose your own sauce visit. Michael: Except we use real fish and real meat in our subway sandwich. Don't know if this is the best analogy but people get the point. Daria: Yeah, like yeah, we're you know, we're the like a guest who's probably accretes you're just kind of getting the you know, whatever the prepackage Subway sandwich that, you know, is not customizable, and you can't even choose your sauce. So that's kind of how I would think about it. I think the benefit of it is like, look, you can still kind of see what are the properties, underlying properties inside the, like those mini portfolios, for example, which is definitely something that you want to get with like a traditional public REITs, I feel like that they're kind of more giving you like, hey, this is our general structure, or a general investment objective, this is what we're doing this is like, let's say, 30% of our portfolios in Georgia, like x percentages in some other state, which is also great for those people who don't really have much conviction, and maybe they just want to get the general kind of diversified exposure. But you can also have to just be mindful of this kind of this still difference, there is still like this difference that exists between private and public REITs, where no public REITs are still subject to the same market volatility as any other stock would be, you know, I wouldn't say that there is like one, right or wrong way, just kind of, it's all about diversification, and what fits your investment goals and investment needs, and what makes sense for you, and for your investment portfolio and, you know, we're just kind of offering a way for real estate investors to create their custom REITs, if they want to get exposure to the whole asset class, if they wish to do so. They can also mix and match they can invest a little bit into public rates a little bit into private REITs and again, you know, there's it's always, diversification has always been a good way for you to kind of diversify your risk, so… Michael: Yeah, okay, I do get well, Daria I have a question. That's maybe on every buddy's mind who's listening, you talked about the hurdles and barriers to entry of investing directly, and that's usually coming in the form of down payment heavyweight financing and there's steps involved, how much does investing in recycling cost? What's Is there a minimum investment is our maximum investment, like walk us through what that looks like? Daria: Yeah, so we actually kind of tried to bring it down to minimum investment is $5,000. So anyone who so there is like a limitation that we you do have to be an accredited investor and accredited investor is something that's basically set up by CC, that's kind of their rules and regulations that in order for you to be invested in private REIT, you kind of have to be an accredited investor and I think it's kind of basically done for the benefit of the investors themselves. Since it is a limited liquidity you do want to make sure you have enough liquid cash that kind of set aside you know, that you have access to because you will if you're invested in into like any private vehicle private REIT or anything else, usually you know, you will not be able to like us you know this drill those money for like five years or so and so, I think that accredited investors just kind of really done to make sure that investors understand that this particular funds will not be able they will not be able to access it and they have enough liquidity on hands to you know, meet any some sort of like liquidity needs that they have during their like day to day life. Now accredited investor, someone who, who is an accredited investor, guess accredited investor is someone who has a net worth of a million dollars and that can include their real estate, investment portfolio or retirement, you know, retirement portfolios, or, you know, bank assets, kinda you name it, it can't include their private primary residence, but if they have secondary homes, and, you know, if they can only count equity basically on those properties, so if they have like a mortgage on the secondary home, they will have to figure out like how much of equity they have, and they can count it towards their networks. Another way to understand if you're an accredited investor is if you are making over $200,000 per year, and you've made over $200,000 per year, in the past two years, or you and your spouse or partner are making over $300,000 together this year and in the past two years. So those are kind of some of the limitations that beans set and they just kind of follow those limitations. But as long as you are kind of accredited investor, you can put you know $5,000 into like a Roofstock One REIT and there's $5,000 can be invested across all of our offerings. So we you know, we are not limiting you can only put $5,000 into like a separate a single kind of mini portfolio or a tracking stock. What we call, you can, you know, put $1,000 or $100 into tracking stock and the rest into like a giant, like a bigger font or you know, vice versa. So you can customize this $5,000 as much as you would like. So yeah, that's, that's kind of the limit. Yeah… Michael: Great. Okay and I would imagine that other private REITs and for sure, public REITs that have been around for a while, have a track record the history of performance does Roofstock One have that yet or is it too new, like, how has it been performing to date? Daria: Yeah, we do have a track record on Roofstock when you launched Roofstock One in November last year. So we are a little bit close to like a year of existence. So we have been distributing dividends and the dividend yields that we have distributed for the historical or like our past offerings, they are listed on our website. They can be accessed here, the investor reports and we also do have appreciation of the assets that has happened since we acquired them back in, let's say, November. So we just recently started to calculate something that's called nav, which is net asset value of our investments and that's in general, how private REITs figure out what is the value of their shares. So unlike public REITs, where the share price has been determined by the kind of just the normal forces of the markets, private REITs, because they're private, they, you know, they had to kind of figure out a way to value the assets, the underlying assets that they have and so the net asset value is kind of the common term where NAV is kind of a common term that they use to figure out what is the share price of their rate and that's what the Roofstock One does as well. So we are just like any other private three, we calculate NAV, we publish it, and then can investors are able to track estimated value of their shares. Now the reason I say it's estimated is because obviously, until we sell the assets, we wouldn't know the exact value of, of the underlying assets, we can only kind of do like an estimation of where we think it is right now. But it is, you know, a good proxy, I guess, for an investor to think, hey, this is like my estimated value. But you know, until you can actually sell the assets and just kind of the nature of real estate market in general, that it's very illiquid, and you wouldn't know the value of the asset until you actually like listed for sale and you started getting some buyers who are interested giving you offers etc. So very similar, you know, in REITs, because we own underlying assets. There, you know, we're kind of subject to the same market forces as any anyone else who owns real estate. But you know, net asset value is a good measure for someone to use to determine what is the estimated value of their shares. Michael: Okay, okay super informative from the history to the product offering and why it makes sense. This is awesome. If people want to learn more about private REITs chat with you learn about Roofstock One, where's the best place for them to do that? Daria: Yeah, we can be found on the roof stock.com website, or someone can just type in www.roofstock.com/O N E -one. That's our website. Now feel free to give us a call there is a button that you can click on and request a phone call and we have very friendly people to chat and they're always happy to talk about real estate, private REITs single family rentals investing. Now we love investors ask us questions and they love talking to them on various subjects. So yeah, you know, feel free to check out our websites style by ask questions and we are always happy to chat. Michael: Amazing, well thanks again and definitely looking forward to seeing where Roofstock One goes from here. Talk soon. Daria: Thank you Michael. Thank you for having me today. Michael: You got it, take care. Okay, everyone, that was our episode A big thank you to Daria for coming on really interesting stuff with the product offering as well as the history of REITs themselves. So go check out the website at roofstock.com/one. As always, if you enjoyed the episode, definitely love hearing from you. All ratings and reviews are super appreciated and we look forward to seeing the next one. Happy investing…

united states talk vice president saturday night live fed subway goldman sachs savings great depression cc nav reits reit full story rtc sml roofstock operations specialist fractional ownership federal home loan bank michael you michael yeah michael okay michael all remote real estate investor michael awesome

The facts and fictions of asset protection with lawyer, Brian Bradley

Play Episode Listen Later Oct 11, 2022 36:19

Brian T. Bradley, Esq. is a nationally recognized Asset Protection Attorney. He has been interviewed and a featured guest on many top shows such as: Bigger Pockets Rookie, Flipping America Podcast with Roger Blankenship the “Flipping America Guy” and member of the Forbes Magazine Real Estate Council. Brian was selected to the Best Attorney's of America's List 2020, Lawyers of Distinction List three years in a row (2018, 2019, 2020,) Super Lawyers Rising Star List 2015, nominated to America's Top 100 High Stake Litigators List, nominated to the 2017 Law Firm 500 Award. Brian also writes on high-end asset protection. Ownership of real estate has many benefits from an investment and tax standpoint. There is downside risk, however, since the value of real estate holdings may be significant and can be used to cover damages awarded in a lawsuit. Therefore, it's important to consider asset protection strategies relating to real estate holdings in order to minimize such risk. In today's episode, Brian lays out how asset protection really works from a legal standpoint and dispels some common myths that are thrown around in the industry. Episode Link: https://btblegal.com/ --- Transcript Before we jump into the episode, here's a quick disclaimer about our content. The Remote Real Estate Investor podcast is for informational purposes only, and is not intended as investment advice. The views, opinions and strategies of both the hosts and the guests are their own and should not be considered as guidance from Roofstock. Make sure to always run your own numbers, make your own independent decisions and seek investment advice from licensed professionals. Michael: What's going on everyone? Welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum and today I'm joined by Brian Bradley, asset protection attorney and he's going to be dropping some knowledge about all the things we should be aware of as real estate investors when it comes to protecting our assets. So let's get into it. Brian, what's going on, man? Thanks so much for taking the time to hang out with me today. I really appreciate it. Brian: No, absolutely Michael, thanks for having me on. It's going to be an important topic, a fun topic, I'm gonna try to keep it fun and not legally dense and you know, just like I'm not anyone's, you know, Attorney here legal guru. So we're just gonna be talking generalities, right? We're gonna learn a lot in this, you know, it's gonna be a lot of fun and as you're building scale and making more money, you know, you're getting a bigger red button on you and so like this world of where we're gonna be talking about asset protection is kind of a big deal. There's just a lot of ways to skin a cat, different layers, different strategies for where you're at in your life. So, you know, I think as we break these down, hopefully I can, you know, make this will make a little bit more sense for you and your listeners. Michael: Yes, it will. Thank you. I am super excited to learn a lot because before we hit record here, you and I were chatting about some of the topics that we'll be covering today and I was like, what is that totally brand new. So I'm really excited from a self-serving perspective. So give everyone that quick and dirty background who doesn't know Brian Bradley, who you are, where you come from, and what is it you're doing in real estate today? Brian: Yeah, absolutely. So, you know, I'm an asset protection attorney, you know, we're talking about it off recording, like from Lake Tahoe, so you know, big snowboard ski, you know, ski bum, you know, Lake bum, I got into asset protection from the litigation side of the law, I was selected to America's best attorney list 2021-2020 Super Lawyers rising star 2021-2015. Michael: My guess is that no, that's not like an online survey, you filled out to get that… Brian: Oh, no, and another do with me, that's really just people that you work their butt up in court, and then they recommend you or judges recommend you and I have nothing to do with it and it's actually pretty, you know, I appreciate even just the nomination, let alone winning it, you know, to where I think they only say 1% of all attorneys in the nation even get nominated for those awards, let alone then, you know, 1% of those even gets picked to as a as a winner and so… Michael: Congratulations… Brian: Thanks, yeah and for me getting into, you know, asset protection, which will define what that is, you know, in a minute, like, that'll be like our think our base starting point. I just, I just got into this weird area of law, because when I like money, I like investing, I like, you know, not paying as much taxes as you know, as I can and as you grow, you got to be smart with your money, right and who can take it from you and so as a trial lawyer starting out, I just had so many clients who were being sued and their lives just turned completely upside down coming to me after they're already being sued and at that point, you know, you're just too far down the rabbit hole, you know, it's like going to get a car insurance after you already got in an accident or, you know, home insurance after your house already, you know, caught on fire, it's just, it's not gonna happen and so I see a lot of people thinking that they don't need to do anything is another misconception. You know, it's kind of human nature, right? You know, like, I'm just gonna ride lady luck. I'll deal with it when I when, you know, it hits me later on and that's just not how anything that needs to be proactive in the legal sense is going to work like insurance or asset protection. Wishful thinking is not a protection tool. You know, that's how everything you know, like, go to Vegas, go to breaks and hit the roulette table and see how long your wishful thinking is gonna last for you, right? You know or, you know, as you're leveling up, people forget about this. Like, as your wealth is leveling up, you're leveling up, you don't level up your protection, you don't level up your insurance. Yeah, people go buy an umbrella policy, but they don't realize what an umbrella policy is just like everything else, right? You know, it just provides more access and money to, you know, for coverage, but it doesn't, it's not the same escape clauses, you know, like, there's no insurance in the world that's gonna say, okay, hey, if I go punch you in the face, are you gonna cover it for me? No, like, they don't cover you for intentional wrongdoings or allegations of fraud and intentional wrongs and so that's how they have their escape clauses out especially for very big cases. You know, if you're talking about like a million dollar or more lawsuit. A couple other big misconceptions that we need to address as we lay this landscape is just, you know, the revocable living trust, if people think like, oh, yeah, I have a trust, right, that you know, they don't realize trust. There's a lot of different types of trust. Your family estate plan, your revocable living trust are not designed to protect you while you're living in they don't have the lead have teeth to be able to. So once you pass, they're only designed to avoid probate not protect you while you're living from lawsuits and then over the last five years, I've noticed this massive misconception about the use of limited liability companies. LLCs and they just think that they're like, you know, Silver Bullet Dracula slayers and you guys miss, like, first word first letter, like limited, I tell you. Whereas, whereas this happened, where's this come from? Like, they're not hiding the fact they tell you like they titled it telling you limited liability. So like, now we have to reeducate people on this, like, yeah, don't put everything in the world under one LLC. Otherwise, if it gets pierced, you're gonna lose it on like, What are you talking about, which we'll break that down, you know, in a little bit. And then the sad thing is like, and I think it's worth explaining is this, if you just look around, and you look at, you know, our legal system and the world we live in, it's just broken, it's a broken system, you know, and we're so happy nirvana and just to like, kind of lay this framework down a little bit more. We're no longer about justice. We're about redistributing wealth from the haves, which is you, your listeners, people trying to grow and accumulate more to the have nots and over the last 40-50 years, things that didn't happen in the past, or that weren't allowed to happen in the past like contingency fee lawyers or law from advertising their common place. and then this created a cultural shift of a predatory legal system that's no longer about justice. So it's about profits now and then when you get on the road of high net worth, in affluent families and wealth, this level of protection, now we have to deal with taking a macroeconomic, more of like a global look about what's going on and the big picture here is really that we have a global financial system that has structurally deep rooted issues. You know, we have government backed fiat currencies that are now in question. This is also including the US dollar. So don't think like, just because we're in the US, we're exempt from all of this, you know, monetary policy today, you know, the one that exists is, you know, inflate or die and then you got governments looking for a deep and accessible pools of financing and meaning our money, you know, the hard workers, the people who are investing, along with financial repression, monetary economic manipulation. So this just adds all the challenges that we have to deal with when we're looking to protect your assets and so asset protection is that modern best bet to level this playing field by using a lot of the tools and the combination of the tools that we're going to talk about today to make it very hard for you to be collected on and so what this is really about is just like a talk about giving you peace of mind, lifestyle preservation, and you know, really just how collectible are you at the end of the day… Michael: Love it. But well, I am all about doing things to help peace of mind and insulate ourselves from the world at large. This you happy world at large. So help us understand Brian, like, what are some of the things when someone says asset protection to you like, Brian, I gotta protect my assets? What does that mean to you? What alarm bells are going off in your head? Brian: Yeah, absolutely. One is like, do you understand the difference between tax mitigation and asset protection and I've been getting this a lot, you know, especially this last year, obviously, as we see what's going on, you know, within inflation, taxes and everything right now, asset protection is not tax mitigation, like that's your CPE and wealth managers job. If creating an asset protection plan or an asset protection, trust or going offshore, you know, where to create tax havens like one that's illegal, it's fraud, you know, so system won't work, and then you go to jail for that type of stuff. Michael: So don't do that is what you're saying. Brian: That's not what this is about. So people always like, oh, I want to protect my assets and I don't want to pay taxes, completely two different things. The asset protection plan is to protect your assets from predatory lawsuits and litigation, not saying I want to not pay taxes, that's tax mitigation, talk to your CPA and wealth managers. First, lock down your assets from lawsuits because if you get sued and lose everything, what's your miracle working CPA going to be able to do for you if you have nothing for them to work on, so order of operation, protect your assets, then let them work through the system that's created to actually like mitigate, you know, forced depreciation, all those wonderful things that they do cost segue analysis… Michael: Yeah but Brian, to that, to that point, really quick. I'm just curious, like, do you work with a lot of CPAs because I can see, I can envision a scenario in which the legal side of things is super buttoned up super tight, but maybe isn't very tax efficient and so my guess is there's probably a happy medium, or some input that a CPA or wealth manager can inject into the situation to help make both things as tight as possible. Brian: Correct. You got to, you know, the issue generally is people don't involve their lawyers until later on down the line and it creates a lot of problems. So for example, a lot of CPAs will set up S Corps for investors, especially real estate investors for some reason, and great for tax purposes, horrible for litigation and I get this call a lot, you know, and most of my clients are calling with like 50 $100 million of real estate all stuffed in one S Corp. Okay, great again, for tax mitigation, horrible for let's say you get sued and now you're S Corp and all the shares get frozen and cease, there is nothing I can do for you. At that point, I can't move assets out and then even if I want it and you realize like, oh my god, I have so many pieces of property under one corporation like this is very risky, I need to start diversifying and employing these assets out, you're stuck, you're not going to be able to and I just had this call yesterday with a potential client. The reason is, when you're all the benefits of the S Corp, right? You know, deferred taxation and all this stuff, you're kicking the can down the road, once you start taking the assets out, you have to pay the money back and so people don't generally have millions of dollars sitting in their bank account saying like, okay, hey, I feel like you know, taking all the assets out of my S Corp now and now I'm going to go and pay the piper and the IRS. So because you don't have that money sitting around to pay the IRS and the taxes, we can move the assets for you and I'm not going to force you to go, you know, and have the IRS coming after you to collect on you and move the assets out anyways, because now you're just creating a bad situation for the client. So the lesson here to learn is if you're thinking of investing, you need to talk to both the lawyer and the CPA, because a lot of CPAs, they shouldn't be giving you legal advice. They're not lawyers, and they're not going to understand the aspect of what happens actually in court with s corpse and C corpse, when it comes to litigation, and why we don't want to use those to protect your assets. So we have to all talk together. The problem is I get this all I get the mess after the fact right, and then I have to start supporting afterwards and so when done, right, really, the modern, you know, estate planning is asset protection, what we're doing is creating legal barriers between your assets, and your potential creditor, the person suing you, the person trying to come after your money before it's needed and that's it, you know, it's like a safe for your gold or your guns or your valuables. Anything of value, you know, you want to put behind the legal barrier and out of your personal name so that it's not easily attached with a lien or reached and so I just like the rich, I really liked the Tony Robbins saying success leaves clues. The rich don't own things in their personal names their businesses do their trust, do they just get the beneficial use and enjoyment out of them while separating out that legal liability and we do that through just like different tools and mechanisms that we have kind of like key concepts and roadmaps like LLC is limited partnerships and trust. Michael: Got it. Okay and so when real estate investor comes to you, they're just getting started. They are moist clay, you can totally mold them, they don't already have a bunch of issues. What is your go to, like ideal scenario for asset protection? Brian: Yeah, so there, I mean, you're just starting out your green horn, like really just going to be an LLC and insurance and that's where you're gonna go, okay and as you think about how to use these systems and how to grow within them, okay, I want you and your listeners to think about winter, okay, like we were talking about this before we started recording like I'm from Lake Tahoe, snow, cold snowboarding skiing, I lived in Michigan, freezing cold arctic, you know, minus 40 degree weather for a while, well, I'm in Portland damp cold, you got to really layer you and so the first entry layer is as your base layer, when you're getting dressed, it's going to sit on your skin. This is the equivalent of an LLC and insurance. This is you know, when you're just starting out investing in you have zero to three units, or you know, zero to three properties, you're exposed net worth generally is like 250,000, net or below and then as you grow, and you add more assets, and you hit around that four unit or four property mark, you could be starting to invest in a couple different states as well, you know, you have now around like 500, to 700,000 exposed nets, what you need is a mid-layer, which is usually a little bit thicker, that's going to be made out of like a merino wool sweater, or for you ladies a car and again, this is your management company, like a limited partnership and I can break down that later on if we have time and then when you hit around that 1 million net worth mark, you know, you're gonna want to water shell waterproof layer. This keeps you nice and dry and warm when the weather's really bad. You know, this is your doomsday lawsuit protection layer is going to be an asset protection trust and specifically for our clients, we use a hybrid trust, which is combining an offshore trust and domesticating it through the IRS. So when a client comes to me, I receive it I realistically, you want four things you know, you want you're going to want an effective plan to have, you're going to want to control your plan. Three, you want a reasonable and sustainable cost, you know, depending on what layer you're at, is going to be individual for the for the client profile and then four you want a plan that's going to be easy to maintain compliance on what the IRS like I can create the strongest thing in the world for you. But if you're not going to be maintaining it and you don't want to do the IRS compliance with it, eventually you're just going to stop doing it and the whole system falls apart. So as you go through the valuation process and you're talking to different attorneys and you're vetting the process, just remember the acronym ECCC effectiveness, control cost and compliance and as long as you can start checking off all those boxes, you know you're gonna have a really good system. If you want to I can break down the first layer if you want to Trying to kinda go there like LLCs, or just really wherever you feel like directing this. Michael: Yeah, so I think our listeners probably have a good handle on LLCs. But I would love if you would walk us through what this hybrid trust is because it's not something that I'm familiar with, I've never heard of before. Brian: So yeah, and I think the reason why is like not many people focus on asset protection at a high level, you know, I think events like insurance, a lot of people wonder not only purely asset protection attorneys, right, they're generally business attorneys who do some asset protection or their real estate, you know, attorneys who do a little bit and they take continuing legal education course, learn about LLCs, and the kind of stops there and like insurance, they kind of tried to cast a large net nationwide, what was one thing you can cast nationwide and LLC and so I kind of think that's why like, the base layer, knowledge kind of stops there, because not many people just focus on, you know, very, very strong protection. This comes with the asset protection trust. So it's this final layer, the bad weather, you know, the outer shell waterproof layer, is this asset protection trust, it's going to be really the heart and soul of the system, especially when you have over 1 million exposed and that wealth and what I mean exposed is like your 401 K is exempt. So I don't include that in a net worth evaluation, because it's already a reset protecting some states, like if you're a Florida resident, we have a very strong homestead exemption of 100% of your of your primary residence. So I will take that out of the equation too, depending on the state you're in and the homestead. So what we're looking at is exposed unprotected, and that, you know, equity and wealth, all right. The great thing about trust is that they can be sculpted, to fit how you need them and they can morph as you need them without dealing with funding issues that you're going to fall into an LLC and other business entities that get their protection pierced, meaning now you're going to be held personally liable. So I just love trust and having a trust at the very top of the planning is very powerful and this is where picking the proper jurisdiction for a trust really comes into play. The standard 101 trust that I'm sure like everybody's familiar with, you know, kind of started in the 60s is the family revocable living trust. So you know, like when trust, you know, trust don't die. So then when you do, you act, and you fund your trust, which a lot of people forget to do, like, oh, I created my estate plan, and then they never transfer title into it. Remember, fund that fund the trust, if it's just, you know, your revocable living trust, the benefit of it is when you pass you don't have to go through probate, you can just skip the court system and probate and it changed the landscape of estate planning. Then you have what are called land trusts for real estate, you know, you hold your land, and then you connect them to an LLC. But land trusts don't have any protection in and of themselves. They're only as strong as the LLC that they're connected to, you know, so they're just a privacy mechanism, not a protection mechanism. Okay from there, you have higher levels of trust. They're called asset protection trust and I really want to spend the time, you know, with this and break down the three different types, you know, and after this, I think you and probably 99% of your listeners are going to know more than 99% of all the attorneys out there about asset protection, trust, they came, yeah, they came about in the early 1980s. You know, and so an asset protection trust is what's called a self-settled spendthrift trust. All sell settled means is that you created it for yourself, you know, they're for you, by you, as your own beneficiary, and they have very important spendthrift provisions in them. So this lets you protect your assets while you're actually living, you know, from creditors trying to sue you from not having to relinquish control of your assets. The difference is that they allow you to protect your assets, not just for your grandkids, but for yourself, which you weren't allowed to do in the past and then like I said, you're probably familiar with another type of self-settled trust the revocable living trust. They're the same and that they're self-settled created for you by you. The difference is that with an asset protection version of this trust, it includes these critical provisions called spendthrift provisions and what spendthrift provisions are is they are provisions that allow you to protect your assets from the creditors, they're the actual teeth behind it and for those to work, the trust them has to be not revocable, but it will revocable. So it's a very different type of trust, you know, just like chocolate or vanilla, both ice cream, just different types of ice cream. Michael: Yeah… Brian: You know, this is where the fun really starts to actually happen. There's two major school of thoughts here you can go international meaning offshore, another country jurisdiction, you know, you hear about Cook Islands, Cayman Islands, Belize, in the Bahamas, or domestically here in the US, you know, Nevada, Delaware, Wyoming, Texas, um, so you can set them up here in the United States and you know, if you don't mind, I think a great way to talk about it, just kind of talking about it through historical context, because I think if you understand the foundations of both offshore and domestic then you understand the principles of how we combine them together and why you want to Michael: Yeah, let's do it. Brian: Alright, cool. So again, you really have these three options, right, you can establish them offshore, you're going establish them domestically, and then we can hybrid them out like a hybrid car, take the best of both worlds put them together. So from the historical concept, the offshore trust actually came first, in 1984, when the famous Cook Islands, they created the first asset protection trust. I like and choose the Cook Islands if and when it's applicable, just because it literally offers the best home court advantage and why it's the best is because asset protection is just what these trusts in the Cook Islands were specifically drafted for and the power here is they have this wonderful word called statutory non recognition of any other jurisdictional court orders in the world, including the United States and so what this means is that if you have a judgment against you, in the United States, and you took it down to the Cook Islands, your US judgment is literally worthless, it literally has no value whatsoever. statutorily the Cook Islands they prohibited from recognizing it even from their own constitution and so if somebody wants to sue your trust, and it has a Cook Islands, you know, clause in it. So as a Cook Islands trust, they will have to start their case all over from scratch, the person who's suing you, they're going to have to prove their case beyond the reasonable doubt. This is the murder standard, the highest legal standard in the world that 99% sure standard. Not that you know, 51%, preponderance of the evidence, I'm not sure we don't know what happened. But we don't like the way they look right now. So let's just let's just give it to them. You know, you can't get a contingency fee attorney to represent you, because they're just not allowed down there. It's an ethical in the Cook Islands, just like it used to be unethical here in the United States. But then that got changed in the 60s, the claim meaning the lawsuit, you know, it's not amendable. So what this means is that it can't be changed or amended after the discovery process starts like we can do here in the United States. Like we can literally just say, okay, I'm suing you for this, dig around start discovery, then completely change what We're suing you for, because we started using as a fishing expedition. The person suing you, yeah, no, I mean, this is just like standard trial tactics is like, okay, hey, let me just flood you with discovery and like, start poking around and say, oh, hey, we didn't even know this was right here. Now I'm gonna add this to the complaint and sue you now, for this looks like a better cause of action anyways, I can't do that down there. But we can do it here all the time in the US. Michael: So it sounds like I need to go move to the Cook Islands. Brian: Now. Well, here and maybe not right, because you know, there's, there's cons to things, we'll get to the cons in a minute. So the person suing you, they're gonna have to front the entire court costs by the judge from New Zealand and if you lose your pay, you know, and I honestly think this is one of the worst things that we don't have here in the United States, though, like the loser doesn't need to pay the legal fees and the cost of the winner. So if you get sued for something completely bogus, I mean, a frivolous lawsuit, and you spend $200,000, defending yourself on legal fees, then the judge finally is like, this is ridiculous. I'm throwing this case out, you're still out 200,000 bucks, you know, the person who sued you, they're not going to be getting the bill for that because our legal system in the United States, they just that will discourage lawsuits and our legal system is run by trial lawyers who don't want to discourage lawsuits and there's only a one year statute of limitations. So if you go back to those four things I mentioned, right, remember, like effectiveness, cost, control, compliance, I mean, effectiveness, five out of five stars, nothing really nothing beats statutory nonrecognition. So what about the other ones, right, you know, control costs and compliance. This is kind of his kryptonite, you know, these are the drawbacks. If you're going to be purely foreign, like a purely foreign trust, you have a lot more IRS reporting, compliance and disclosure. So you have these things called IRS forms 3520 3520 A's. What this is, is a full balance sheet disclosure of everything that trust owns, and sometimes even the entire trust agreement to be disclosed and submitted to the IRS and it is expensive for this IRS forms to be done every year. Also, you're going to have factor compliance, because you're going to have a foreign bank account at that time. And of course, we're these trusts to work, you're going to be out of control of the trust. That's why they work so good. That's why they're the creme de la crème and clients are just not comfortable with this. So while we literally have the most effective trust in the world, by far, it's not something that I generally start with, I probably only say like 1% of my clients, I will go to a purely foreign trust with which then brings us right to the second option. Okay, we're not going to be going forward and what about these domestic trust? Yeah, they came about 10 years later down the road of all places, Alaska started it out and then not to be outdone, obviously, you're gonna be like, Well, hey, we're Wyoming and Nevada and Delaware like this is what we're known for. So we're jumping on the gravy train, right and then now about 19 other states now have created some form of asset protection, self-settled trust statutes. So we're seeing as a state starting to jump on board seeing yeah, our legal system is a threat and things have to get done to protect your assets and so as to protection the United States is very is very important to understand this ballot on It's just the concepts like how you go about doing it is very important. The issue with a purely foreign under the purely domestic asset protection trust is that, you know, we live in the United States of America, we have a Constitution, Article four section one for Faith and Credit Clause. What this provides and means is that every state has to grant the full faith and credit to the judicial proceedings of every other state. What this is means what it's telling you is that, for example, Nevada can pass and has passed an asset protection statute, okay, but it cannot ignore a California or Washington or like another states court orders. So where the Cook Islands can literally just throw that California judgment in the trash. Nevada can't do that. Nevada has to respect it constitutionally and even litigate it and then you have courts that are just simply ignoring the choice of law clause. So I mean, like literally, like bait levers more dissent in re Hubber, cucumber Steelman, Dover still all great facts, all great cases, they should have one of those cases, and judges literally just use their superpower public policy, we're ignoring the you know, choice of law clause, trust is breach means loss of assets, that's just completely unacceptable and so because of the case law that we're seeing, I'm not a big fan of a purely domestic asset protection, trust or anything purely domestic without something offshore built into it. This is why I prefer the hybrid version called like, we just call it a bridge trust, but it's really just like a hybrid, hybrid trust, think of them like a hybrid cars, okay? What we're doing just combining the best of both, and then making a better product and so these trusts have been around for almost three decades. So they're not, you know, the new lady to the dance, they've been around for about 30 years now and at the end of the day, what you're doing is taking a fully registered foreign Cook Island, offshore asset protection, trust, what all that for two years of solid case law, again, so it's fully registered offshore from the day we created with the offshore trustee, they're there in standby just in case you need them and then we build a bridge back to the IRS for IRS classification. So the IRS is literally taking this foreign trust and then they're classifying it as a domestic US trust, by complying with USC Section 7701. It's called the court test control test and so because of that bridge, as long as we have our compliance in place, we stay classified domestically and what this does is that the trust is now going to be cheaper to create. So generally, a purely foreign trust is going to cost like 4550, even $60,000 plus $12,000, a year to maintain very expensive, a hybrid trust is going to be cheaper, you're generally gonna be talking about, you know, 23 to 30,000, to set up a hybrid trust, plus no IRS tax filings whatsoever, while you're domestic because it's classified as a domestic US grantor trust, so you have no more IRS tax filings, unless God forbid, we have to break that bridge and now you also get the power of the offshore trust. If and when we need it. It's in our toolbox now, just like a contractor who says like, okay, hey, I don't need to use all my tools today. But I'm going to need them possibly at some point. So now I can use them as I need them. Versus coming to me later on after the fact oh, my God, Brian, I mow somebody over with my car, like, can you help me? You know, like, I want that foreign trust? Well, no, sorry, it's after the fact I can't do it now. But if we have the hybrid, I could have engaged it. So that would be like during the State of duress, we would break the bridge, stop being an IRS compliance, you are what you are a foreign trust. Until that point, you want to be classified domestically. So that hybrid trust is very, very effective, you may control of your assets, you may take control the trust, right up until that doomsday scenario where you don't want to be in control of it anymore. You know, maintenance and compliance with the IRS. Very simple. So at that point, you've now checked off all the boxes, effectiveness, cost control and compliance check, check, check, check, check and so this is where you know, for our clients, we generally are starting with these hybrid trust. Michael: Wow, this is wild, is super cool and so are you thinking that most folks that are in that kind of million dollars of expose net worth, this is where that starts to make sense. Brian: That's exactly like, so our main client profile that comes in you would think they'd be like, you know, 10s of millions of dollars for us, like realistically, I would say 75% of our clients generally around that 1.2 million, exposing that. Some high risk, probably like a doctor or surgeon lawyer, or just straight real estate investors. I have some of my favorite clients, nurses, firefighters, cops who self-funded their retirement through cash flowing properties, and now they're about to retire and they realize like, I can't lose all of this now because this is literally my nest egg and my legacy. Yeah, they need to lock it down and so you generally see the average client profiles like 1.2 to 2 million of exposed net with some risk, and it makes sense at that point. Yeah, get the LLC get the limited partnership get the trust for like 30,000 dollars locked down a million plus, and then sleep well at night. That's when the investment kind of makes sense for this type of protection. Michael: Yeah, that makes total sense and what would you say because I would imagine, after listening to this folks might go to other attorneys they work with mentioned this type of hybrid trust and they might be told now you don't need an LLC is good enough. I mean, what's the I know, we've talked about kind of a counter argument, but how does that conversation get ahead? Brian: Most of the time, I was, say, like the one the estate planning attorney, they will know about this, because their knowledge base, you know, is just not going to be around, let alone foreign trust. I mean, there's not that many people who even know like that much detail about how a foreign trust works, let alone using the incorrect domestic asset protection trust, you know, how many times I have California residents, using the Nevada asset protection trust, and the person who set it up for them, like the lawyer has no idea like, okay, what about this case? We're still in 2012, California case that said, hey, you're a California resident, we don't recognize asset protection trust, because we don't have the statutes here. So your Nevada asset protection, trust, and sorry, it's worthless, it's not gonna it's not gonna work, you know, so unless you go to an actual specialist and say, hey, here's the case law, here's what's going to happen down the run. Most people don't have that level of education, because they're not in that world. They don't exist in in it. So I feel bad for the clients because where's the knowledge come from? You think you're going to an attorney who was specialized in this, but you're not taught this in law school, you're not taught this for the bar exam, so how you develop this level of knowledge is really just did you get into the right group of people and were you passionate about it enough to like transition your practice into it… That's why I do these talks is just to educate people and you know, just the base thing, like, why not just an LLC, they're disregarded entities for tax purposes. So they're disregarded for taxes. That means it's disregarded to you for lawsuits and liability, meaning you're pierced. If you're using them for real estate. They're not businesses, they're holding companies, which means the number one argument that will win and pierce that every time is well, Your Honor, this is an actual business. It's an extension of Michael is just a holding company. Boom, you're pierced funding issues, bad accounting systems, like there's four ways to pierce that veil right there and I don't even have to think part about it. Charging, charging order protection mean, like what state do I go set these things up in? You know, how many times I hear people like, oh, just go create a Wyoming LLC? Are you a resident of Wyoming? Is the asset in Wyoming and the answer is no to either one of those, you just tried to buy another state's jurisdiction, that you have no connection to try bringing another state's laws to like California and other state that you're not connected to, and there's no reason to, you're gonna get laughed out of court. Like, it's just you can't go by other states more beneficial laws and bring them, you know, to another state that, you know, that has no jurisdictional connection to it and anonymity is the other like, really, like, flavor of the last like, two years is like, oh, create this anonymous, Delaware or Wyoming? Trust and Ghost the lawsuits, right? Yeah, well, that's not how these that's not how it works but that's how it's being sold by, you know, law firm salesmen and promoters. Yeah, create this and get a really crazy operating agreement and then next thing, you know, like, you're never gonna have to show up in court. I'm sorry, you have a personal agent of service for these out of state law firms their sole job, like, let's say, Mike here is my, you know, personal agent of service, he's gonna get my service and he's gonna say, hey, Brian, here's your service. That's why dude, you just… Michael: Got to show up in court… Brian: Court now and amenities done at that point. So the only way that an amenity works is you show up the court, a judge is gonna say, Hey, you're getting sued for a million bucks. Here's your you know, asset disclosure list. Tell me everything that you own, because we didn't know what can be collected on or not, at that point, and amenity or a quote, unquote, air quotes, Secrecy is now up to you. So you're gonna decide, am I gonna lie under oath and hope to god, I don't get you know, my operating agreement will hold up and commit perjury in court, or do I just disclose it. So like, you're the weak link at that point and then if you lie and commit perjury, under oath, you're going to jail on top of losing your assets. So it makes more sense just to say, hey, create a proper asset protection plan, LLC in the state that is layered up into a management company, once you hit the net worth put in the trust, and then sleep well at night because at the end of the day, I don't care if you lose your lawsuit. I care about it for your collectible or not, you know, like you can lose the 10 $50 million case. I just if the asset protection trusts setup strong and in the right jurisdictions with a proper exit strategies, does it mean that you can be collected on and then it lets me settle a case for pennies on the dollar… Michael: Dang this is nuts, Brian… This is like or this is earth shattering stuff. We got to have you back on to talk more about this. But I want to be very respectful of your time get you out here for people that have a similar response and you're like, holy crap, I gotta call this guy Brian, immediately. Learn more about this, reach out for your services. What's the best way for folks to get in touch get a hold of you? Brian: Yeah, one great resources, jump on my website, www.btbegal.com , I use it more as an educational resource with a lot of case law client studies. I just want you to be educated at the end of the day like, listen this here's the case law. Like, that's what lawyers should know about, especially trial lawyers. That's why I'm a good trial lawyer. I tell stories through case law and then another great way is through my email, you know, Brian: B R A I N @btblegal.com. I do you know, free 30 minute consultation, whether we're a great fit or not, like we'll figure that out over the phone. I would just rather how people have an educated decision, and then they can like go shop around. Michael: Love it, love it. Well, hey, man, thanks again for coming on. Really appreciate the time and we'll definitely be in touch. Brian: Yeah, for sure. Thanks brother… Michael: All right, everyone. That was our episode, a big thank you to Brian for coming on talking about a lot of things that we've never heard before on the show and definitely bring up some excellent counterpoints to be thinking about as always, if you enjoyed the episode, feel free to leave us a rating or review wherever it is to get your episodes and we look forward to seeing the next one. Happy investing…

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Entity structures for investing, and which one is right for you w/ Garrett Sutton

Play Episode Listen Later Sep 24, 2022 32:23

Garrett Sutton is a corporate attorney, asset protection expert and best selling author who has sold more than a million books to guide entrepreneurs and investors. For more than 30 years, Garrett Sutton has run his practice assisting entrepreneurs and real estate investors in protecting their assets and maximizing their financial goals through sound management and asset protection strategies. The companies he founded, Corporate Direct and Sutton Law Center, currently help more than 13,000 clients protect their assets and incorporate their businesses. Garrett also serves as a member of the elite group of “Rich Dad Advisors” for bestselling author Robert Kiyosaki. A number of the books Garrett Sutton has authored are part of the bestselling Rich Dad, Poor Dad wealth-building book series. There are three types of entities most commonly used to own real estate: Limited Liability Company, S Corporation and Limited Partnership. Tune in for todays episode where Garrett provides a quick summary of the best entities for real estate investment. Episode Link: https://corporatedirect.com/contact/ --- Transcript Before we jump into the episode, here's a quick disclaimer about our content. The Remote Real Estate Investor podcast is for informational purposes only, and is not intended as investment advice. The views, opinions and strategies of both the hosts and the guests are their own and should not be considered as guidance from Roofstock. Make sure to always run your own numbers, make your own independent decisions and seek investment advice from licensed professionals. Michael: Hey, everyone, welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum and today I'm joined by Garrett Sutton, who is an attorney, investor and author with over 1 million copies of his book sold and today Garrett is gonna be talking to us about all the different entity structures we should be aware of as real estate investors, as well as wherever we might want to think about forming those entities because it plays a big role. So let's get into it. Garrett, thank you so much for joining me on the show today. I really appreciate you taking the time. Garrett: Thanks, Michael. It's a pleasure to be with you today. Michael: No, no, the pleasure is all mine ad I'm super excited to chat with you. I know a little bit about your background and what you do kind of on a day to day basis. But I would love if you could share with our listeners who you are, where you come from, and what is it that you're doing in real estate today? Garrett: Well, I grew up in the San Francisco Bay Area like you and I moved to Reno in 1989 and Nevada is a great state for setting up LLCs and corporations along with Wyoming. So I practiced corporate law since 1978, and became associated with Robert Kiyosaki and have written a number of books in the rich dad advisor series and you know, have enjoyed talking to people around the country around the world about how to protect your assets. As you start investing in real estate, you need to think about how you're going to protect that real estate because we live in a very litigious society, people sue each other all the time and unfortunately, they don't teach this in school, you have to get this information on your own and so that's what we provide is the information you need and then we offer a service to help you protect your real estate and brokerage and other assets. Michael: Love it and just right off the bat, I read one of your books for our Roofstock Academy book club, it was a great read, so I can definitely vouch for it. But what are the books that you've written and then what talk to us about your most recent book? Garrett: Well, I've written a number of books in the rich dad advisor series, including start your own corporation, that's kind of a foundational one, and then run your own corporation, a lot of my clients and I set up a corporation now what do I do, and you have to run it properly. Then I also did loopholes of real estate, which is kind of the tax and legal strategies for investing in real estate and then the newest book is veil not failed and that deals with the corporate veil, you set up an LLC or a corporation to be protected and too many people do this themselves, Michael, they just set it up online, and they don't realize that there are additional steps you have to take to stay protected and so if you don't want your veil to be pierced where someone can sue the company, there are no assets there. They can go through the veil of the company and get it your personal assets, if you don't want that to happen and that's why you set up an LLC. Michael: That's the point, yeah… Garrett: It's that you don't want it to happen. You need to follow these corporate formalities and so that's what the book veil not fail is about kind of stories, horror stories of people who didn't follow the rules and then in the latter part of the book, it shows you how to follow the rules so you can stay protected. Michael: Yeah, great. and where can people find out if they're interested in picking up a copy? Garrett: Amazon has it the veil not fail. It was supposed to be out in April, but we have this thing called supply chain problems. Michael: I've heard of that. Garrett: Not enough paper out there. So it's not out until November but you can go ahead and preorder it. Michael: Fantastic. Garrett, let's talk about I think a pretty hotly contested and debated topic in the real estate space and that's LLC versus no LLC, I think and it's tough because we're I'm California based. A lot of our listeners are California based and so to have an LLC in California, you're paying at minimum 800 bucks a year and with today's cash flow based on some real estate investments that can eat in to your investment pretty significantly and so I've heard folks say, you know, forget the LLC, go get umbrella policy, go get high liability limit insurance and call it a day. Don't worry about it. What are some risks pros cons associated with doing that, that you've seen folks run into? Garrett: You know, there's a whole area of law called Bad Faith litigation, and that's when insurance companies collect the premiums and then find a way not to cover you. All right, the insurance companies have acted in bad faith over the years. errors in collecting the premiums and then having exclusions, that little tiny print that you never read and so, you know, the insurance companies, let's face it, they have an economic incentive to not cover every claim and so they're going to find reasons not to cover you and so I always recommend that people have insurance. That's the first line of defense but these LLCs are the second line of defense, in case the insurance company doesn't cover you, or what about a situation where your insurance is, say 2 million, but the judgment is 4 million, right? I mean, you're personally responsible for that extra 2 million. If the property is in an LLC, they can get what's inside the LLC. But if you've done it, right, if you if your veil is strong, they're not going to be able to reach your personal assets for that extra 2 million. So the idea that you're just going to rely on insurance is, in my opinion, quite naive. Michael: Yeah. Okay, I love it. I'm of the same opinion. I always, I never like to play my hand, though but I love hearing that because I come from the insurance world. So I know how bad things can go and I also have seen how they're supposed to work. But I think you're totally right, there's totally an economic incentive to not pay claims and the insurance industry as a whole gets kind of wrapped in with the folks that are doing the latter, not the former. So I think it makes a ton of sense. But Garrett talked to me about I've heard this concept, and this idea that, okay, there's this, you can be over insured, there is such a point. Now, if I go get a $10 million umbrella, because I really want to be protected. Does that then put a target on my back for a claim or a plaintiff to say, well, hey, he's got a pretty a pretty massive insurance policy, you know, I was only going to sue him for a million, but let's go after the full 10. Garrett: Well, I mean, there are a number of factors there. I mean, having enough insurance is not a bad thing. If the claim is a million, it doesn't give the attorney the right to try and collect 10 million, you know, I mean, the claim is a million. So you know, the fact that you have extra insurance isn't a bad thing. The attorneys, you know, what we like to do, what we tell our clients is you want to have enough insurance to cover any claim and so you want to have insurance on the property fire casualty, right? You want to have a personal umbrella policy of insurance covering your home and your autos because I think that's the biggest risk out there is a horrific car wreck, right. Do you need that umbrella policy, a commercial umbrella policy over your various rental properties, maybe I had a part such a policy for a while but here in Reno, it got pretty expensive and so I just have regular insurance on the properties. I have regular insurance for my home and autos and I have an umbrella policy for me personally and so you get in that horrific car wreck. There's enough insurance money for the attorneys to get at. They know how to get at insurance monies, they get a percentage of what they collect and then if everything else is held in LLCs you know you'll have a an LLC if you own a property in Oregon, you have an Oregon LLC on title, you own a property in Utah, you'll have a Utah LLC and tie on title and then those two LLCs are owned by one Wyoming LLC. That's how we like to structure things and the attorneys are going to have a tough time collecting from a Wyoming LLC and so they leave you alone on the LLC. Do you have enough insurance to pay the claim and they'll leave you alone on the LLC is that's how we recommend our clients structure things. Michael: Okay, and why Wyoming LLC because I know you made a very deliberate point of saying where is formed, what's the point? Garrett: There are three really good states out there and they compete against each other to be the best which is good for us. Instead of having one federal law that applies to every single state. After the American Revolution, each state wanted their own corporate law and so now we have each state with their own corporate law in Delaware, Wyoming and Nevada compete against each other to be the best. You know, the filing fees every year that come in are pretty good. It helps fund the government. So the reason I like Wyoming over Nevada and Delaware is all three protect the owner of the LLC the charging order is the exclusive remedy and all three, but in Nevada and Delaware the annual fee is $350 a year and in Nevada they list your name on the state website. In Wyoming the annual fee is $62 a year and your name does not show up on the State web site. So Wyoming offers lower cost, better privacy and equal protection. So a lot of our clients set up Wyoming LLCs. Michael: Yeah, okay, well, I'm sold. So being a California guy, though, this is what I've heard and would love your insights. So I've been told that California they want their piece of the pie. So I've got to register any LLC that I own. In California, because I'm a resident here, I live here, even if it has not doing business, because the way California defines doing business is basically me living here. So if I do I own property in Oregon, I own it with an Oregon LLC, that LLC is owned by the Wyoming LLC, but then I gotta register both of those here in California? Garrett: No, you raise a very good question. So in our example, we had an Oregon LLC and a Utah LLC and if those were owned by you, as a California resident, we'd have to pay 800, twice, once for Oregon, once for Utah, by having the Wyoming parent there, the Wyoming LLC, and we qualify that one to do business in the State of California. You don't have to pay the 800 for Utah, or Oregon. So that's a way to save the $800 for all the title holding LLCs yes, one of them has to pay right $800 to the state of California and you know, California has gotten a little bit looser, you don't have to pay the 800 the first year, that $800 is a credit on the first $50,000 in profits. So it's not like it's wasted. So, you know, I've had people move from California to Nevada, because of that $800 fee. It's just infuriates people. But there is if you love living in California, there's a way to work it so you have protection, and you don't have to pay $800 for every single LLC you own across the country. Michael: Okay, fantastic and then in going back to that example, if I've got the I've got to register the Wyoming LLC here in California, do I lose out on any of the anonymity that Wyoming affords me because now it's registered here in California? Garrett: Yeah, you'd have to list your name in California. Michael: Okay, all right. Yeah, maybe I will think about moving, who knows? All right, Garrett, in your book, and I want to get really nice here for a minute, because I've got you. You talk about quitclaim deeds versus warranty deeds and I think a lot of our listeners out there have utilized this practice, or have heard about this practice because if you go get a conventional loan from a traditional bank, they won't lend to an LLC. So you go get the name the loan in your name, then transfer the property title to an LLC after the fact, right. In the book, you talk about quitclaim deeds versus a warranty deed, can you give us a little bit of insight into what the difference is and why someone should think about using one versus the other? Garrett: Well, the warranty deed or the grant deed says, I warrant that I own this property and if I don't, if I transfer it to you, and I don't own it, for some reason, you can sue me. All right. So it's a more powerful deed. The grant deed, the quitclaim deed rather, says, I don't know what I own. But I'm transferring whatever I own to you and the title companies go, well, he quit claimed that property and so that severs the title insurance, right because he didn't know what he had and so we're not going to cover him on it on a quitclaim deed and so and too many people pronounce it quick claim. Michael: I know, I know. Garrett: You know, and it's the same deed with a couple of different words in it. But you really always want to use the grant deed or the warranty deed because in many cases, you sever the title insurance, when you use a quitclaim deed, okay, and that's…. Michael: Okay and that's even if you're going from yourself as an individual owner to an LLC that you own 100% of? Garrett: Right, yeah, just ask for the grant deed. Also, if you're buying property from someone, you want to insist on a grant deed or a warranty deed, because if they don't deliver the title that they've promised they are going to deliver, you have the ability to sue them for failure to perform. Michael: Okay, super good to know, super good to know, Garrett, as people who are just getting started on their investment journey, I mean, what's the appropriate time to set up an entity because I've heard people say, I'll do it later. I'm too small. It's too expensive. You know, what are your thoughts there? Garrett: Right at the start, you know, it's just not that expensive. We do not charge a lot of money to set up LLCs for people. It's very affordable. It's a business expense, you get to write it off. But I'll give you an example Michael and I I've told this story 1000 times, but I was in San Francisco at an event and I gave a talk about asset protection and this lady comes up to me and she goes, Well, I'd like to transfer title. I just bought a duplex and I'd like to transfer title into the name of an LLC. I go, that's a great idea. I go in California, it's $800 per year per entity and she goes, oh, I can't afford that and so I'm giving a talk in San Francisco again and she comes up to me and says, I've been sued by a tenant, I'd like to set up that LLC now. Well, it's too late, right? You know, the tenant rented from you, in your individual name, UX, they have a claim against you as an individual, and they can reach all of your personal assets as a result and once you've been sued, or even threatened to be sued, it's too late to set up an LLC. I mean, you can't put a seatbelt on after the accident. Yeah, right. So you really want to set this up right at the start and I've heard CPAs say, oh, well, you know, just set it up when you can and that's bad advice. I mean, you know, the joke I tell is that CPA stands for can't protect assets. It's just, you need to set this stuff up right now. Michael: Yeah, yeah. Okay. I think it makes a ton of sense and I love the seatbelt analogy. I think that really hits home for a lot of folks. So as someone that's getting more sophisticated with their investing strategy, what like tools or strategies should they be aware of as they're starting to scale up and they're investing? Garrett: Well, I think having that Wyoming, LLC is the parent holding LLC is a good strategy. We talked about an Oregon LLC and a Utah LLC owned by one Wyoming LLC and that Wyoming LLC is passive. It's not going to hold real estate, it's not going to do business with anyone, because if someone sued the Wyoming LLC, they could get at Wyoming at the Oregon and the Utah LLC. That's what the Wyoming LLC owes. So that Wyoming LLC is passive, it doesn't do business with anyone because we don't ever want it to be sued. All right. So that's a key strategy in protection. Now, if your clients are holding brokerage accounts, right, bank accounts, gold and silver stock brokerage accounts, in their individual name, the same rules apply. If they get sued personally, and they have all these assets at a Charles Schwab account in their individual name, someone can very easily get those and so what we do is we set up an LLC for the paper assets for the bullion and if you get sued, and that horrific car wreck, they're in an LLC, it's much different, much more difficult for an attorney to get at those because the exclusive remedy in Nevada and Wyoming is what's called the charging order and that is a lien on distributions in the state of California if you own an LLC that owns a piece of real estate in California, the law in California is that the car wreck victim can go to court and the judge can say yes, you've been injured, you can set forth the sale of the duplex. All right, and that is not good asset protection. So we like Wyoming and Nevada where the court says, okay, you have a claim. But here's the remedy that we offer in our state, you are entitled to distributions that come through the LLC, you can't barge in and force the sale of the real estate, you have to wait for distributions to come and that's not a good use of the attorneys time. You know, monitoring if distributions are made there on a contingency fee, they get paid when they collect on the insurance monies. So their time is better spent going to the next case that has insurance. So that Wyoming LLC that offers the charging order remedy, not where they can barge in and force the sale of the real estate but where they have to wait and monitor distributions that go to you. It's a much better system for protection than choosing a weak state like California, Utah is a really weak state, New York is weak. So we have to understand which states are strong and weak and structure your plan accordingly. Michael: Yeah, interesting and Garrett, talking through all this kind of makes me beg the question of in our Utah, Oregon, Wyoming, California LLC example where the Wyoming LLC owns the properties. There is a holding company rather, if the tenant in Oregon falls and Sue's sues the owner. I mean how far Is this go and where is the court date held, how does that all work? Garrett: Well, if you, if the tenant has is renting from the Oregon LLC, that's or they're in contract with, so the claim would be tenant would sue the Oregon LLC, the lawsuit would take place in Oregon, right? That's where the property is. That's where the tenant fell. The action stays within the Oregon LLC, it doesn't give the tenant a right to go down to the Wyoming LLC, which is the parent, it doesn't give the tenant the right to go over to the Utah LLC. That's a separate business entity. So the key here is that if the tenant sues, you want to get notice of that lawsuit as soon as possible, right, you want to turn over this claim to your insurance company, so that they can assist in settling the case. Too many people, Michael have this idea that if they use a land trust, where no one will ever know who the owner is, and no one will ever serve you is just nonsense because you want to get notice of the lawsuit as soon as possible. In the Land Trust scenario, they say, well, geez, no one will ever find out who the owner is. Well, what happens is they go to court and they say, Look, we tried to sue the land trust, we couldn't find out who the owner was and the court says, okay, well published notice in the newspaper. So they published it little two point type in the newspaper that We're suing the Oregon LLC, or the Oregon Land Trust, rather and you don't get notice of that either. They go back to court and say we tried to serve them, we published notice in the newspaper, and no one ever showed up. The court says default judgment, meaning the tenant has won and then when they're trying to collect, you know, you find out that you've been sued, the insurance company can say, Well, look, you should have had notice of this lawsuit, we could have defended you, but we're not covering you now. You didn't give us the proper notice and so this whole idea of a land trust and privacy is just nonsense. You want to get notice of a lawsuit, so you can turn it over to your insurance company. Michael: Yeah, that makes no sense. I guess it's kind of like the ostrich approach like if I stick my head in the ground, I don't see it. I don't hear about it. It's not a problem. Garrett: Yeah, it is a problem. Michael: Interesting, okay and Garrett talked to us about some of the different entity structures that are out there. Because there's the C Corp, the S Corp, the single member LLC, multi member LLC, like should we as real estate investors be thinking about utilizing some of these different corporate structures or is really the LLC that that kind of 45 of structures. Garrett: Pretty much the LLC is the way to go, if you're going to hold real estate, you in some cases, the limited partnership can work. If you're syndicating real estate and you want to absolute control, the limited partnership can work, you're not going to hold title to real estate in a C Corp or an S Corp or any other kind of corporation, tax wise, it's just not the best way to go. So the LLC is pretty much I mean, 98% of our formations for real estate are LLCs. The other 2% would be LPS for syndication purposes, or, you know, for estate planning purposes where mom and dad with an LP, the general partners, which would be another LLC can own as little as 2% and have absolute control over the property. So mom and dad through their LLC have 2% ownership, the limited partnership has 98% ownership owned by the kids as limited partners, and the kids can't force mom and dad to sell the property. So there are cases where the limited partnership works but in the vast majority of cases, it's the LLC that is on title to the real estate. Michael: Okay. Good to know, good to know. I had another question for it and it totally escaped my mind. Garrett: Well, how about fail not fail the new book? Michael: Yeah… Garrett: You know, people have these promoters out there just say that most wrongheaded stuff about LLC. I mean, they say that you don't need an operating agreement- wrong. They say that you never have to issue stocks or timber membership interests certificates- wrong. So you you'd need to treat your LLC, like a corporation whereby you have to follow these formalities. You have to have the annual meeting, right and the idea that you never have to have a meeting is when you get into a court of law, you're in front of a judge or a jury. I want you to have a minute book with the minutes of every yearly meeting in it and these promoters say, well, you never have to have a meeting. I want you to walk into court and tell the jury, yeah, I ran this property for 12 years and never had a meeting. It just doesn't work. Michael: It's not going to fly. Garrett: It's not going to fly. So you know, the reality is, when you're in a courtroom, the reality is not when you're in office with a promoter telling you don't have to do anything to maintain your LLC. It's just not accurate. Yeah, so that's why I wrote the book, because there's so much misinformation out there about corporate formalities. So with a corporation, you need to follow the corporate formalities and with an LLC, you need to follow the corporate formalities because someone suing can pierce the corporate veil on a corporation, they can pierce the veil on an LLC. It's very, and the rules are not hard to follow. They're really easy. It's just if you don't follow them, they can go through the LLC and reach your personal assets. Michael: Yeah no, that's such a great point and also, Garrett, I mean, to that point, if someone listening is thinking about reaching out to an attorney for help with forming for entities or restructuring entities, I mean, what are some questions they should be asking and things they should be looking for, with an attorney that they want to put on their team? Garrett: Well, does the attorney invest in real estate? I mean, I think that's a good question to ask because, you know, I invest in real estate, I've been through the wars and so it just helps you appreciate what the client is going through to have done that yourself. You know, I think some attorneys specialize in personal injury. In contract cases. I mean, you want someone who really knows the ins and outs of LLCs, and appreciates that we have good states and weak states, and that you have to put the combination together to fully protect the client. Michael: Yeah, that makes total sense and we're recording this, let's see September 2022, what is like the reasonable cost to form an LLC, and then what are any kind of maintenance fees associated with maintaining the LLC? Garrett: Well, we charge a flat fee of $795, in that, and then the filing fees are on top of that. So Wyoming, for example, is $100. That 795 includes the registered agent for the first year. So you're not paying any extra for that. We also have a system whereby we keep all your documents and if you have lost your operating agreement, we give you a portal where you can go on and download your documents. So we kind of have this backup service for you and then so you pay the 795, the first year, and then the second year, it's already formed, so everything drops down, you only pay 125 to four, the registered agent. Now we give you a book that shows you how to do the minutes because you really should do the minutes every year and even though we give you the book with the forms in it, a lot of people don't do it. So we offer a service where for $150 a year, we'll make sure that your minutes are done and we want to keep you in good standing, we want you to have those annual meeting minutes in your file, just in case you don't want to be in a courtroom and say I never had a meeting. Michael: Right, it's too late, then like you said, Garrett, this has been super informative and people want to reach out, continue the conversation, take advantage of your services, what's the best way for them to get in touch? Garrett: Well, they can go to https://corporatedirect.com/schedule/ and set up a free 15 minute consultation with an incorporating specialist that you'll work with this person all the way through the process and they'll give you a quote for what our services entail and you know, just see if there's a fit, we're happy to talk to you and so we set up entities in all 50 states, maybe you're you set up your entity already, it's an LLC, you don't have an operating agreement, you haven't issued the membership certificates. Don't tell anyone but we can clean it up for you. We also offer a registered agent service in all 50 states. So if you've got one company here, one company there we can be your one company to serve as the registered agent in all 50 states. So we'd be happy to help your listeners Michael and you know, have them call corporate direct or go, go visit the website, corporatedirect.com and there's plenty of information and articles there and kind of tells you what we do. Michael: Amazing. Well, Garrett, thank you so much for that. One final question before I let you out of here. We've said the term a couple times. But for anyone who maybe isn't familiar, can you bring them up to speed on what a Registered Agent is and what the importance is? Garrett: Well, the Registered Agent is someone in the state where you set up the entity or where you're qualified to do business and the idea is that instead of having someone who's trying to sue you search all over the state of Texas for you, right? The Registered Agent is an address where someone suing, you can go and serve the registered agent with service of process. So it's just it's kind of an efficient way for the justice system to work. It's one place where you can serve an LLC or a corporation, and then they're responsible for forwarding that on to you and so you want to use a reputable registered agent service that knows the importance of a lawsuit, if we get a notice of a service, we're on the phone immediately to our client, because you've only got 30 days to get an attorney and answer that complaint. So you don't want a mom and pop that is going to go out of business or doesn't appreciate the consequences of being served with a lawsuit. So it's an important function and if you fail to pay the Registered Agent, they're going to refuse service a process and then they're, you know, the person suing us is going to go back to court and get, you know, authorization to publish notice in the newspaper, and again, you're not going to get noticed to this cert of the claim. So you want to have that registered agent on your team at all times. Michael: Yeah, yeah, super great point and the Justice Department looking for efficiencies. That's not something I maybe I've ever heard before. So really exciting stuff. Garrett: It's something that does exists, so… Michael: Oh, Garrett, thank you. Again, this was super informative, and I definitely would love to have you back on once your book comes out in November. Garrett: That sounds great. Thanks, Michael. Michael: You got it, take care. We'll chat soon. Garrett: All right. Michael: All right, everyone, and that was our episode a big thank you to Garrett for coming on. Definitely take advantage of that. 15 minute free consult if you're interested. As always, if you liked the episode, feel free to leave us a rating or review. We'd love to hear from you all and we look forward to seeing on the next one. Happy investing…

new york california texas state san francisco oregon investing utah llc nevada wyoming cpa delaware lp ux reno san francisco bay area structures american revolution justice department robert kiyosaki entity lps cpas rich dad charles schwab poor dad llcs s corp land trusts bad faith c corp s corporation garrett sutton rich dad advisors roofstock limited liability company corporate direct michael you michael oh michael it michael yeah michael love limited partnership sutton law center wyoming llc michael okay michael all michael hey remote real estate investor

Learning from the mistakes of a veteran investor w/ Pete Neubig

Play Episode Listen Later Aug 24, 2022 34:26

Pete Neubig is a realtor who focuses on investment properties. Pete has been investing in real estate since 2001. He has owned and managed a 39, 52, and 100-unit apartment complex. He currently owns single-family homes and a 52-unit apartment complex. Pete created a property management company based on the motto "By investors for investors". His property management company has clients from Houston and all over the world. His technology-based systems allow owners to see everything that is happening at their property without having to be involved. Tune in for today's episode where Pete talks us through some of the mistakes that he made as an investor and how he's doing things differently today. Episode Link: https://www.vpmsolutions.com/ --- Transcript Before we jump into the episode, here's a quick disclaimer about our content. The Remote Real Estate Investor podcast is for informational purposes only, and is not intended as investment advice. The views, opinions and strategies of both the hosts and the guests are their own and should not be considered as guidance from Roofstock. Make sure to always run your own numbers, make your own independent decisions and seek investment advice from licensed professionals. Michael: What's going on everyone? Welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum and today with me, I have Pete Neubig who is a real estate investor and CEO of VPM solutions and Pete is going to be talking to us today about some of the mistakes that he made as an investor and how he's doing things a little bit differently today than maybe your typical investor. So let's get into it. Pete, what's going on, man? Thanks so much for hanging out with me today. Appreciate you coming on. Pete: Michael, thanks so much for having me, I'm really looking forward to it. Michael: No, me too and so before we hit record here, you were telling us about the three different lives that you've lived. So you are a super interesting guy. Needless to say. So for anyone who hasn't heard of Pete Neubig before, give them the quick and dirty rundown of who you are, where you come from, and what you're doing in real estate today. Pete: Sure. Well, real quick. Let's see, I'm from New York City originally, I moved to Texas in Houston back in 1995. So I have a gun. So I guess I'm a Texan now. Michael: Give me one when you move to the state, like I think… Pete: They give you a cowboy hat, a gun in some boots, you know. So I started buying real estate in 2001 when I bought my first property, actually, I bought a duplex and a single and a a 100 unit apartment complex like same day, like I closed on the same day, I ended up owning bunch of property that I ended up starting a property management firm and I got so busy doing that, that I stopped buying real estate for a while just to build the investment, the property management business, I ended up selling the property management business and now I started a an online platform. It's a virtual property management solutions or VPM solutions where we connect the real estate industry with virtual talent around the globe, so… Michael: That's so cool. Pete just taking a total step back to say you're from New York now living in Texas, do you remember like I don't know in the late 90s, early 2000s there was that pace salsa commercial where like all the cowboys were sitting around like, where's that guy from New York City, New York City? When you say that, that's like the first thing that I thought of like, oh, hey, salsa commercial. Pete: And I still can't say y'all correctly I get I get I get yelled at all the time and I'm down here saying y'all, so… Michael: Y'all with the New York accent, I love it, I love it. Well, you did you I mean, this is a really cool trajectory that that you've ended up on and I would love to focus on kind of the first stage of your investing career where you own a bunch of rentals and again, we were chatting before we hit the record button, and you were saying that you had sold a bunch of them off, and then actually paid off some of the remaining ones. So walk us through, you know, like, why because I think I think a lot of people would be like, oh, that's stupid, like, what is Pete doing? You gotta have leverage. That's how you juicy return. So, you know, walk us through how you built up the portfolio and then why you decided to sell them but then keep some free and clear. Pete: Sure thing. So I started buying on my own first right so I own like 12 I think it was like duplexes. I was for some reason I was love duplexes. I think most people would say, well, it's the cash flow, right? Duplexes, have a great cash flow and I was always looking at just cash flow and I think if I go back in my, in my investor life, I can tell you, Michael, I've lost so many millions of dollars by not buying houses with very low cash flow, because I forgot about this thing called appreciation, right? I wasn't buying cash flow, right and my goal at the time, I was a young man, I was early 30s, like 30-31 when I started buying, my goal was to get enough cash flow so I can just leave my corporate job. That's kind of what the way I was thinking. So I buy a bunch of properties and then I get I get talked into being a passive investor for 100 unit apartment complex and I told if I buy one apartment complex, I can retire right? So I'm like, oh, great, you know, monopoly, I'll buy a bunch of houses, sell them and all that good stuff. Well, it just never materialized. I was buying lower income homes and if anybody knows the lower income homes a cash flow is really just on the sheet of paper. It's not it's not true returns unfortunately, because there's little things like you know, the evictions or you know, not getting all the rent and in the make readies are not a couple 100 bucks or a couple of $1,000 because people in low income they take what's called parting gifts. You know, they take your AC, your doors… Michael: Your goodie bags, you know… Pete: Yeah, good. Yeah, exactly. Exactly. So, so I ended up connecting with a business partner named Steve Rosenberg, who he's kind of a a national speaker now but Steve and I ended up finding his guy who is offloading a lot of his portfolio. So we thought this is great and we ended up buying like 30 houses and we were both enamored with buying property. But we didn't had no idea what to do once we bought them. Like we were terrible and how to manage them. So what happened was… Michael: Pete was this was this local in New York or local in Texas, there was this remote? Pete: Yeah, great question. So I was, I was, I had lived in Texas at the time, we're buying everything in Houston. I there was no such thing as Roofstock that we knew have to go buy stuff in other areas and back in the early 2000s, the average price of a single family home in Houston was like around 130. I was buying it for 35,000. Like, lower low income houses. Yeah. Michael: But not have roofs, like, what's the deal? Pete: Man, they were just in low income and today, those houses are now worth about 150, right, 20 years later, and I was buying them at 35 and they were worth 50 to 55,000. So I was buying them below. But I just found an investor who wanted to offload stuff but he was offloading me all his problems, right and if you don't have good management, behind you, if you have a good management company, by the way, it's really difficult to manage these low income stuff. It just is because they don't pay online, they don't abide by the lease, they have dogs, when they say they're not going to have dogs, all that all this stuff that you have to deal with. It's just difficult and so Steve and I, we ended up buying 31 homes. So now I have 31 homes, and we advertise bad credit, okay, no credit, okay, like you have you have a pulse and $1 will, we're gonna let you in the house and of course, that comes back to bite you to the point where not only are we not making the cash flow that was projected, but we're losing money at the end of the year, now I have to come in and pay for my taxes and my insurance and so now I'm working even harder at my nine to five than I did and I'm working hard to manage these properties. But all of a sudden, this this like, dream that you have is becoming a nightmare and so, you know, caution, number of cautionary tale number one for your listeners is buy absorb, right, and then buy some more like don't just keep buying if you can't manage the assets, or number two is go find a professional management company that will take your properties. My problem was I had my problems was so low, I couldn't get a professional management company to take my properties. The manager companies know how hard they are and I'm like, Well, I'm gonna give you 25 They're like, Yeah, great. Keep it like, we want to charge you more. So I ended up creating the management company with Steve so we can manage our own properties and so there's been two there's two things, the two big instances that happen in my investing life that has propelled me to pay off properties, right. So let's get to your question. The first thing was I bought all those properties, and I wasn't making cashflow, right, but I had to pay the note every month, right and at the end of the year, now I'm getting in tax and insurance. And so there was no cashflow there and there's no appreciation I just told you it took him 25 years to get that double or triple of appreciation. So I own these properties for 10-12 years for 35,000 and they were worth like 45,000 right 50,000 I told you I got equity, but that nothing ever increased. So when that when the banks are coming and asking for their money, and I gotta go work a double because I need more money, or I gotta go sell off stock because I got to. So that that was something that kind of made me realize maybe I want to be the bank myself, or maybe I don't want to owe the bank so much money. So that was the first thing. The second thing was, I ended up buying that 100 unit apartment complex that I told you about and that 100 unit apartment complex. I am still today friends with the lead investor, he's a good guy, we just had a bad plan. We lost the apartment complex. Now I was a passive investor and now here's cautionary tale number two for your investor listeners. If you're going to be a passive investor, make sure that you either A have an attorney you trust or be read the documents yourself. So I was a passive investor, but I was legally on the hook for with my credit. So I personally signed the note. Yeah, I see you I see you if you for those of you not look, for those of you listening and not watching the video, Michael's jaw just dropped, right and so and then what happened was because the plan was bad, we couldn't we couldn't make a payment and so the bank led us to believe that we can restructure our debt. Well, they ended up having somebody that would buy the debt would buy the property from under us. So they foreclosed on us and sold the property for more than what we owed, which in normal cases, you think that's fine. I owed 1.1 million they sold for 1.5 million. I should be off the hook. Well, there was a little checkbox that said no, if they foreclose on me regardless how much they sell, they can sue me for that amount. So I got personally sued for one point $2 million. Oh my god all because now I will tell you this, I paid a mentor and I paid an attorney. Before I got into that deal thinking I covered myself, I got a guy who's done a bunch of apartment complexes, I have an attorney, they just missed that. They just missed it, the mentor wanted to deal to get done because he was the broker on a deal. So it really was it wasn't aligned. You know, are you know, of course, at the time, I was like, get the deal done. But he needed to protect me from myself at that time and so when you owe, so long story short, I ended up selling. I had a six unit apartment complex that I sold, made 30 grand, and I actually was able to, to pay $30,000 to make the lawsuit go away. So the bank knew that what they were coming after me, they knew that they didn't really have a good case because they made their money. So they just wanted their attorney fees paid for but that put the fear of God in me to be quite honest and so I vowed that I don't want to ever be over leveraged, right and so of course, Kiyosaki talks about other people's money and every you know, rich, Guru, Rich Dad, Poor Dad, guy, every guru out there will tell you, if you can borrow 110% borrow 110%. Well, back in the early 2000s, you were able to borrow 110% I don't know if you remember and so I did that, right now. I was fortunate that I was able to overcome when the properties weren't making any money because I had a job. But if you are again, a cautionary tale number three, if you are a full time real estate investor, you cannot survive when you when your cashflow negative, it's very, very difficult, and you have to sell off assets. But if the assets are worth less than what you owe, that's a challenge. So when I got into property management, I realized pretty quickly that people will manage Class B homeless people will buy and rent Class B homes, I always had this mindset that people will only manage or rent Class C or D homes. I'm like, no one's gonna pay $800 in rent or $1,200 in rent, and go buy a property, a nice property and have $1,200 on my mortgage, right? Like it was a mindset thing and so another tale is if you're an investor, don't you don't try to buy anything that you would live in you. Other people will live in stuff that you like, why would they rent stuff when I when you can buy something? So when I found that aha moment, I pivoted and I hired a property manager. Finally I was trying to property manage and I was terrible at it. Like, I'm like, I had to hire a property manager. First day she comes in, she goes, okay, we're gonna fire half your clients, this tree store, we had 67 doors, 30 of them were mine. She's like, we're gonna fire half your clients, because those houses are in are in a low income area. They're not worth managing. We're gonna pivot, we're gonna get these Class B homes. Oh, and by the way, you need to sell off your homes. We're not managing your homes either. So you know what I said, You know what, I've been trying to make this work for so many years and are every year I'm coming at the end of the year, I gotta pay money. Now I quit my job to start my property management firm, which by the way, I was making $105,000 a year now making $12,000 a year am I okay? These properties, they can't be an albatross around my neck. So I sold a bunch of homes. So I had, I think 31 of them and 25 are in kind of the lower income area and I couldn't get rid of some of them. So I owner financed them and that was when I had an aha moment. So I was able to wrap the note, I had a very good, I had a local bank and I had a very good relationship with a local bank, and they allow me to wrap the note, right. So basically what that means is I've sold the property to you Michael, right. But I still own the property, you pay me 10% 20% down, you're gonna pay me a mortgage, and then I'm gonna pay the bank, the mortgage, and I get the spread. Yeah, the first time ever that those properties made me money. Michael: Wow, okay. Were you able to sell them for much more than you paid for him? I know, you said there wasn't much appreciation. Pete: No appreciation. But remember, I did have equity. So I sold them for like 50,050 to 55,000. I bought it for 35,000. So I was able to make money that way but if you think about it, I lost so much by owning and by doing the rehabs that I kind of broke even. Okay, it's great. Like, I'm able to be on podcast now. Tell that story, I guess. You know, it's the school of hard knocks, right? That's it. So college is way more expensive than that, by the way that just took me a lot of time. I ended up breaking even and making a little bit of money on it. But what happened was so when I when I started my property management firm, I don't know if you've ever started a business from scratch, Michael, but it is not easy, right? I didn't I didn't build it. I didn't buy somebody else's business, right. I built it from scratch and, you know, it's at 90 hour weeks. It's every day, you know, and so I got away from the investing thing. So I sold off my assets at a 52 unit that I sold office well took a bath in there, investors lost money. So I don't like multifamily. I can just tell you that much. I know you do. I've listened to some of your stuff. But we could debate that on another pod. A lot of fun things off. So when I, when my property management firm seven years later started becoming like I was working now five hours a week, 10 hours a week, I started getting back into buying investment properties. So I was able to find and a bought a couple of properties for about $120,000. It's called Baytown. So it's a little bit it's like a Class B, B minus area, blue collar, I like it gray area of town in Houston to buy in, because there's a lot of renter's there, but I started buying them and I started buying cash. So of course, you have to have the cash, right. So I had some cash I was able to buy in cash and so all my other properties that I did keep, I kept paying those down, and I have those in cash. So today, instead of 31 non producing properties, I have eight properties, one of them is paid for, and I own the note. So I sold it, I did an owner financing sell and I make more money on that property now than I ever did when I rented it out. I have three others that are paid for three or four, four others that are paid for and then I have four others that have a note on them. With the four that I bought the last four, I bought a boat with a note, it was one of those commercial loans. Package note, I had to put 30% down I did, I bought them in January of 2020. So right before the pandemic, there I bought it for 535 from a California investor he was done. We I gotta because I own the management company. So before I went on the market, I made him an offer and so I got him for 535 they appraised at 640 and I put 30% down and they kept they cashflow beautifully and I have I have a small note and now if I want them to sell one of the houses, I can take it out of notes, sell it pay the note down. So now I own eight or nine properties total and they're worth you know, close to, I want to say like one like one, let's call it 1.2 million, I only want 300,000 or 350 on the whole thing, right and my cashflow is about 12,000 a month, uh, me a little bit less, a little bit less, a little bit less, maybe like 10, five around there and so, so I'm a big fan of owning the property outright. So I have both houses that aren't paid for right, so. So it's just hear me out on this, I am now in my 50s. So in my 30s I was a big fan of taking out mortgages, as much as you can bind as much as you can, because you got this thing called time on your side, you can make mistakes, right? At 50 you have less time, right? I've 20 years less, so I can't really make the same mistakes. So I believe even though I make less cash on cash, right? Less overall, I have this thing where I can sleep better at night, right? The house is paid for like, for example, I own a house, I just had to put in a brand new AC and heater, right cost me like I think like six grand. That's cash flow for a year in most in most instances, right and you can't afford it because you don't have the money. Well, when the house is rented for 2500 a month. That's only two to three months. It's not terrible. It doesn't it doesn't knock you out of the game. You're not always stressed for cash. In my in my in my bank account for my business, my housing business. I got like 30 to 35 to $45,000 sitting there all the time, right. So if anything ever happens, I'm okay and so that in now because they're paid for I have more cash flow. I don't have to pay all the notes all the time. So, so again, as you get older, you're like, okay, well, how can I have like, How can I afford to live day to day? Well, if I have $12,000 a month coming in, and I only have $22,000 going out for principal and interest. Well, now I'm at 10 grand and now you figure another 3000 a month in taxes and insurance. So now I'm at seven grand. Well, that's, you know, that's almost 80,000 a year in Texas. It's not terrible and of course if maintenance happens, which always does you never get that full 70% right you never get that full deal. So because of my past issues with banks, by the way the bank on the 100 unit apartment complex really, they really screwed us they let us believe one thing and kind of did the end around and so because of that, I'm really you know, just I was scared is not the right word, but very unjust and very hesitant, hesitant to do it now. That doesn't mean that I won't take on a note, especially if I can't afford to buy something in cash, but I'm gonna He's going to put 2030 40% down, whatever, whatever the bank wants, and then a little bit more and then I'm like, I'm at the back into my life, right? So I am looking to, to pay these things off. So I have 20, year amortizations. If I could, if I could pay them off in 15 years. Okay, I'm 60-65 and now I have no notes, and I have all these houses paid for and at the end of the day, you want to live on cash flow, right? You don't want to live on like hoping that your properties increase in value, and then you can take the money out. If they're if they're paid for in 10 years, I can go take you know, 80-70, 80% of the value of the house, which are increasing now. tax free. So I have so I do have ability to, to go take the money out. Should I should I choose to do that? Michael: Yeah, man, this is wild, man. This is this is such a cool story and of course, I'm so sorry to hear that you had to deal with all that nonsense, Bs. But it sounds like it helped lead you to the decision and kind of path where you are today. So would you say that you're thankful for those experiences as crummy as they were? Pete: Yeah, look, whatever doesn't kill you makes you stronger and I am truly I think I'm a better business partner today than I then I was back then I'm a better investor today for sure and so overall, I feel like I'm, I'm better, I'm a better as a person, because you won't like, like I said, if it doesn't kill you, the one thing that you as an investor, as a real estate investor, you have to make sure that you don't make the mistake that could put you out of business, right. So in my when I had the 100 unit apartment complex, I use my 401k. No my IRA money, so I went and did a self-directed IRA and that's how I invested my money, lost it all, by the way, okay. Again, at 31, I lost 120 grand, which is a lot of money for me back then. A lot of money for anybody right now. Okay but it didn't put me out of business. Once I once I was able to clear my name with the bank, my credit was cleared, everything was clear. Like it was never it's not on my it's not on my credit history at all, because they know that they messed up and I was part of our deal. So that allowed me to get back in the game and by I had another pair of business partners, that they ended up taking bad advice, they ended up using credit cards, taking money out of their credit cards, cash advances, to put money down to buy this apartment complex, because some guru told them that he did it, just because he did it and it's possible doesn't mean it's the right thing to do. Well, they had declared bankruptcy. So they were they were out of the game. They you have a bankruptcy, you're not going to be buying investment properties. Why don't you know, you're not going to buy your personal home, let alone investment properties. So as a real estate investor, for the for if you're listening to this, you know, it's great to take on some risk. I mean, obviously, we all take on some risk, right? We know there's no guarantee price is gonna go up. There's no guarantee that people are going to pay their rent. There's no guarantee but don't take on a risk that will put you out of business. Michael: Yeah, I love that and I think that makes a ton of sense. Pete, you said something kind of at the beginning of your story that I want to come back to and that's you were buying these low income properties, and you bought them and you scrimped and you saved and you and you put these deals together, and they really hadn't appreciated very much and you sold them because your property manager, right, yeah, that after that, they appreciate it. So like, talk to us about how people should be thinking about if they're in a similar situation, they bought a property. They did all this work to get the deal done. they scrimped and they save and they just haven't seen very much appreciation. Maybe they're in a similar situation where it's not cash flowing, or it's just covering its expenses. It's just not what they thought it was going to be. When should someone cut their losses and run and maybe go try something else or how do they know maybe they should keep hanging on because we're right around the corner from that appreciation jump? Pete: Yeah, that that is if I had a crystal ball, I could I could answer that. I can just, I can just tell you from my perspective, I did everything I could to make those properties work. I mean, I would put it you know, like when we did a rehab, we made the house even nicer than it was right? We got rents up, but for whatever reason, and we just can never get them to cash when we were losing money. After about five years, I think you got to if you do not have the cash flow, where you can lose money every year on your properties, and it hurts you. You know, I think you got to cut the cord after a couple of years of trying everything. You have to try everything though. I'll tell you my grandfather before he passed away, he was in his 80s and he when he passed away, he was worth I think 30 million. So this is a guy who knows a thing or two. But he told me one of the last conversation I had with him he said, Pete, never sell your property. When grandpa died here. We had a lot of property it was he was a mess. The guy didn't put any money into it. Son of a gun when we had to deal with it, but it was luckily all those properties appraise or appraised value over time, time heals all wounds if you can afford it and knowing like, hey, like, I can tell you this when I bought the properties in my early 30s, I needed the cash flow as a means to I try to exit out of the of my, you know, my w two life, right? Luckily, my w two allow me to handle those properties, right, allow me to handle the losses. When I got into starting my own business, I knew the upside of starting my own business was great but starting my own business meant I had to take a huge step back in how much money that I can afford, that I was going to be able to extract out at a business. I wasn't venture backed, none of that stuff, right. I mean, I literally just hung a shingle and I started working. Well, I couldn't afford to lose the money on those properties anymore. So that was, that was a big reason on why I decided to sell. Now I will tell you, I sold all those properties in 2015. I bought them in like 2008 2005 I bought most of them and I saw them 10 years later. So it wasn't for lack of trying Michael like I tried right? Even after 2015 they didn't jump up until recently, like this pandemic has me all jacked up, I have no idea what's up what's down, like, I thought the price would come down. So I sold my last property in that area of town for 120. I bought that piece of property for 50 in 20 in 2005, so here we are. So it kind of matches up right 2005. Here we are 15 years later and that thing actually, you know, more than doubled. Now that property I owner financed, I sold it at 120. It was probably worth 100. Alright, so probably doubled in value over those 15 years. I always pay, I always sell it for a little bit higher because I'm holding a note. I want to build in that appreciation. You want to go through the numbers on it real quick? Michael: Yeah, let's do it again. All right. Pete: So when I when I own the home, and I rented it out, I was renting for 1000 bucks a month. Michael: Okay, you bought it for 50 renting for 1000. So crushing the 2% rule. Everyone on paper is like, oh, you're killing it. Pete: Right? Exactly. On paper, right. So 1000 bucks a month. So now you like Pete, you're making $1,000 a month. But am I Michael? I'm not making $1,000 a month, right? What do we have? We have taxes 300 bucks a month now making 700 a month? What do we have? We have insurance 120 a month. Okay, so now I'm down to 580. My management fee was 80 bucks, I'm down to 500 bucks a month and that's before you get into maintenance and turn, right. So on my best month I make 500 bucks a month. Michael: Oh no. Pete: You wanna go through the numbers? Michael: Yeah, let's do it, man. Pete: Or go through the numbers. Okay, so I'm renting that property for $1,000 a month, right? I bought it for 50 rent it for $1,000 a month, right? So am I making $1,000? a month? No way? No, right because the taxes were 300 a month. So now I'm making 700. Right, my insurance is 120 a month. So now making 580 and my manager fees are 80 bucks a month. So I'm making 500 bucks a month and asked me for any kind of maintenance happens or turn. So the best I can do is 500 a month, right? So now I sold the property I sold for 120 got 10% down. So the notes 113. I sold on a 20 year amortization 7%, I found a company that will actually serve as the note for 30 bucks a month that I pushed on to the buyer. So right now it's cost me nothing. The principal and interest on that house is 7-78 and it's like I think it's like $67 is principal and $7 is interest and that's what I make on that house every month, right? If taxes go up, does it affect does it affect me and my cash flow? No insurance goes up doesn't affect my cash flow. Refrigerator breaks doesn't affect my cash flow Michael: Vacancy could be vacant doesn't affect your cash flow. Pete: Doesn't affect my cash flow. Now I ended up selling this one to an owner occupied. So I didn't sell to an investor on this one. So the owner occupied and he pays and all I gotta worry about is if he doesn't make his payment, I can foreclose on him. I don't know what the laws are in California in Texas, it's about 21 days. Before we before we can start the process and start the process. Michael: Okay, okay. Okay. Pete: So 21 back in the day used to be 21 days, you get them out now it's like… Michael: That's what I was going to ask. Yeah. Okay. So just real quick on owner financing, because I think this is something that a lot of our listeners who own property should hopefully their ears are perking up. How do you underwrite a buyer, someone who's going to be, you know, seller financing from you as the lender as the owner. Pete: So, I don't really care about credit at that point because if they had good credit, they're not coming they're not buying. Michael: They go then to a bank… Pete: Right, exactly. So what I'm looking for and what I'm always looking for is why is it credit bad, right? So are they not paying their rent or are they not paying the you know, the electric bill or whatever, whatever, you know, car or bill or whatever it is, right? So I want to know what kind of why they're why they have such bad debt. I don't care why they have such bad credit, I don't care that bad credit and then I'm looking at cash, how much money they make. So what happens is a lot of these guys, so guy that that bought my property, he's in like the construction business, right? So he has his own little deal, he can't show he shows no income, but he showed me his bank statements and he showed me his deposits for the last couple of years and so I just look at how much cash do you have, can you afford it right and then, as a property manager, I always go to two and a half to three times. So if I can get two and a half to three times of cash for what it's going to cost them all in, then I feel I feel at that point, it's not that big a deal. Also, he's paid me 10% down. So I have some cash there. So if he did move out, or couldn't afford any more, I got a little bit of cash, I could make the place a little bit nicer. Okay but the mentality of somebody who buys your property, even if it's owner finance verse, somebody who rents your property, let me just tell you what happens, right? When somebody used to rent that property, what they used to do there give me a long list of stuff that didn't work in the house, that they wanted me to fix it, right, even though the lease says, as is all that good stuff, right? When somebody buys a house, they're getting a long list, and they're improving the house. When somebody rents your house, they're paying the car to pay the electric, they're paying their damn Hulu bill before they pay you because they know that they can they know the eviction process all the way through and how long it take them right? When they own the house were they paying first and for paying… Michael: The mortgage first. Every time they pay the mortgage, first… Pete: Hulu gets put on the back burner, the car payment gets put on the back burner. So the mentality is completely different. I've only I've only you know, I think he's been over there a little over a year, never had one issue with payment. Knock on wood. Michael: That's great and is the term is the note do you get it full term to 20 years or is it a couple of shorter year term with a 20 year AM? Pete: I will have to double check but I'm pretty sure it's just a 20 year amortization and he just pays me to 20 years and then that's it. So what a lot of people say to me is well, Pete, you're missing out on the appreciation, right? Like, if you sold the house or 100, or the house is worth 120,000 or 200, right? So if you think about this, Michael, most people don't pay extra. Most people don't pay the house off early or if they do right grade, they pay the house off early. They make my money. But he's paying $60 In principal and $680 in interest, right? If you if you pay that house off in 20 years, he's gonna pay that he's gonna pay about 240,000 hours on that house. I think I got my appreciation. Michael: Just fine. Yeah. Oh, man. I love it, I love it. That is so cool Pete. That is such a great story. Pete: I built into cushion of 20,000 so that he can't refinance right away. Right, because the house is only worth 100. So by no one's gonna give him $110,000 or whatever it takes to refinance the house. So by increasing it a little bit, you save yourself at least those first you know, five years or so. Michael: Super, super smart. Super smart. Pete: Yeah, that's a good one. Michael: That's a that's a really that's really good, man. Pete, we could chat for hours, man. What's the best way if people want to learn more about you reach out to you for, nobody gets to cover your VPM solutions today, but learn more about your words, where is the best place to do so? Pete: Yeah, you know, best thing is they can actually I'm on all the socials I guess. But it's Pete Neubig NEU big and you can email me at: pete@vpmsolutions.com or you can just go to our website to https://www.vpmsolutions.com/ and check us out. Michael: Right on man. Well, thanks again for coming on and sharing some wisdom, really appreciate you. Pete: Thanks, Michael. Very good talking to you. Michael: All right, when that was our episode, a big thank you to Pete for coming on super interesting way of thinking and doing things just a little bit differently than maybe we hear about what we need to be doing as investors. So as always, if you've liked the episode, we'd love to hear from you ratings and feedback are always appreciated, and we look forward to seeing you the next one. Happy investing…

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How much time and money can an investment mentor save you?

Play Episode Listen Later Jun 30, 2022 34:25

Rich Fettke has a passion for helping people improve their businesses, grow their wealth, and live more fulfilling lives. He is the author of The Wise Investor, Extreme Success, and the audio program Momentum. Rich is also a co-founder of RealWealth®. Since 2003, the company has helped over 60,000 members improve their financial intelligence and acquire cash-flowing income properties — so they can live life on their own terms. As a licensed real estate broker and an active investor, Rich was selected as a Rich Dad Author for his expertise as a Wealth Mindset Expert. The real estate industry is not easy for everyone to jump into. If you have just gotten your real estate license and feel you need extra support before getting your feet wet, or if you are an experienced agent looking to take it to the next level, you may decide to get a real estate coach. Rich who is a coaching mentor and investor will discuss the value of having a coach and mentor and what you can expect to find in his new book. Episode Links: https://realwealth.com/ https://realwealth.com/the-wise-investor-book/ --- Transcript Before we jump into the episode, here's a quick disclaimer about our content. The Remote Real Estate Investor podcast is for informational purposes only, and is not intended as investment advice. The views, opinions and strategies of both the hosts and the guests are their own and should not be considered as guidance from Roofstock. Make sure to always run your own numbers, make your own independent decisions and seek investment advice from licensed professionals. Michael: Hey, everyone, welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum and today I'm joined by Rich Fettke, who is an author, investor, coaching mentor, surfer, among many other things, and Rich is going to be talking to us today about some of the mistakes he seen investors make the value of having a coach and mentor as well as what you can expect to find in his book, which is soon to be released. So let's get into it. Rich, what's going on, man? Welcome to the Remote Real Estate Investor. Thanks for hanging out with me. Rich: Good to be here. Great hanging out with you. Michael: Super excited. So before we hit record here, you and I were chatting a little bit about some sports where you both share in common, but I would love if you could give our listeners a little bit of insight into who you are, where you come from and what it is that you're doing in real estate today. Rich: Sure, absolutely. My name is Rich Fettke and yeah, interesting. The way we got into real estate investing, I'm an I'm an investor and my wife and I also have a company that helps investors but that was what really got us into it was despair. It was about it was exactly 20 years ago, I was on top of my game, I had a book deal, just signed with Simon and Schuster. I was a business and personal coach had a thriving coaching practice, I was giving keynote speeches all over the country. It was like I was just crushing it and I felt so good. I was 37 years old and then I was diagnosed with melanoma, which is an advanced skin cancer but that's not the biggest deal is that they thought it spread to my liver. So they had me do a CT scan and ultrasound and it kept showing these masses on my liver and so I met with an oncologist and he said, you know, it looks like you got about six months to live and we had a 10 year old daughter. Yeah, it just rocked my world, I had a 10 year old daughter, a three year old daughter. My wife is amazing but she was a stay at home mom and so she was freaking in the sense of what am I going to do financially if Rich dies and so she started to she had a as a coach, we were doing things together, she was also a trained coach and so she had this small radio station in San Francisco that she used to do a radio show on about all areas of life being your best self and personal development and all and she said I gotta figure this out. So she started to help people on that were financially successful, and was interviewing them about how do they create wealth and how do they create financial success and most of them turned out to be real estate investors. No surprise, so she came home all excited. One of them was a mortgage broker and he said, if you get your license, you can come become a mortgage broker. This is about 2003. So you know, things were still the mortgage world is pretty easy back then. So she went and did that. In the meantime, we figured out I had a PET scan, which is the most advanced scan for cancer, and it showed me cancer free. So it was just it was a false diagnosis. It was just hemangiomas little clusters of blood vessels on my liver but that was enough for me to go for those three months of not knowing if I was going to be alive, it was enough to give us the kick in the butt to get out and, and make things happen. So Kathy, and I see after that after I was healed, we started to invest together. We bought a bunch of properties in the Dallas, Texas area and it just took off from there and then Kathy started to help other investors with their mortgages. We had a bunch of friends and family saying, tell us how are you doing this? We you know, how are you doing this out of state investing and so we started we formed a group that we thought would be just a small group of family and friends and people that listen to the radio show. We thought it'd be a couple 100 people and today it's over 64,000 members now at real wealth that we're helping invest. Michael: It's pretty amazing. Richard, good for you guys, so I I'm curious in your coaching business before you got diagnosed, did you ever come across real estate investors? Rich: That I coached? Yes. Yeah and my mindset was, I want to invest in real estate someday when I have enough money and so and I was thinking I needed, you know, several $100,000 you know, to buy that first rental property or first investment, not realizing the power of leverage and how much banks love to lend money on real estate and so that was that was the eye opener for us. Michael: Okay, I love it and what made you go remote? I mean, you're in California and your wife live in in San Francisco. Why did you pick to invest outside California? Rich: Actually Robert Kiyosaki. It was she because Kathy was on the San Francisco radio station she was and it got bigger and bigger or she was able to attract some pretty big names and then this guy who had just written a book called Rich Dad, Poor Dad, not long before that, and he had this cashflow game that he was promoting and we had a friend who was his distributor for crypto cash flow game back in the day and so he was on the radio show, and he warned Kathy's listeners to sell their overpriced California properties and to invest in Texas and so we took his advice. Not we didn't sell all our expensive property, sadly, because 2008 crushed us with our California properties but it was, you know, he just saying for cash flow and what's going to happen, he was currently kind of calling out what was going to happen in 2008-2007. That's what sent us out of state. Michael: Love it. So you also recently have written a book, haven't you? Rich: Yeah, I just finished my second book. 20 years later, well, I have an audio program back then, too but yeah, it took me 20 years to write my second book and it's called the wise investor and it's a lot different than my first book that was mostly coaching focused. It was a nonfiction, basically a personal development book and this book is a modern parable. So it's story forum, and it tells a story of creating financial freedom and but also living your best life. Michael: That's awesome and why did you decide to write it? Rich: Interesting process, you know, I've had my own coach, to walk the talk to over the last 25 years now, I started coaching 25 years ago, and this coach that I that I still talk to every week, or every other week, now, he kept kind of he had read my first book, so he's always kind of knocking on me saying, when are you going to write your next book? When are you going to write your next book and I was like, I'm too busy running this company, you know, we have 27 employees and but then what we did is we applied story branding to our company. Are you familiar with that story branding? It's a guy named Don Miller. He wrote a book called Building a story brand and it's all about basically telling the hero's journey, Joseph Campbell's work, using the hero's journey, just like great movies, do great books do weaving a story where your customer is the hero, and you are the guide. So the company is the guide, you help your customers and so we changed everything on our marketing around that, and how we served our members as being the heroes and I just got into this whole storytelling thing. I'm like, this is fascinating the structure of how to write a story, a compelling story that engages people that elicits an emotional change all that and so one day when in a coaching session, I said, you know, if I was going to write a book, I'd probably tell a story and then he heard that and you just like, What do you mean, tell me more and then that was the spark. So then then I get obsessed with it and I'm like, I could write a parable about what I've learned over the last 20 years as an investor, what I've learned in the last 25 years as a coach, yeah, and kind of weave them together into a story. Michael: How cool and without giving away too much of the book. I mean, what could people what should people expect to find when they when they get a copy? Rich: Basically, it's about this family, man, his name is Ryan Brooks and he's like a hard worker. He's got a wife, he's got a couple kids, and he's making a decent six figure income maxing out his 401k but he has no time for his wife or his kids or even his life and he's not investing. He's basically what we call today, Henry, right? A high earner, not rich yet. So he's… Michael: I love it. Rich: Yeah, they're out there does a lot of people you know, especially in California, where I'm based, and that make a lot of money, make a good income, but they're not rich, they're not wealthy, and they're not investing their money. They're spending it on things and so this guy is, is in that same trap. So he just starts to learn from he meets this new friend and mentor, who takes him out on adventures. Of course, it takes him out climbing takes him out mountain biking in in the sessions, when they're having fun together. He teaches him about investing about how wealthy people think, how rich people operate, and how and how poor people operate and think and he really goes over the difference between, you know, truly wealthy people, and people with a lot of money. He even says, you know, I know some people who are so poor, all they have is money and I see that in Malibu, you know, where I live there's a lot of has a lot of money and some of the people are really stoked and really happy and getting the most out of life and investing their money at some of the people are grumpy and miserable and, you know, that's rich in money but not in life. So there's a lot of lessons about helping Ryan Brooks and his mentor walks them through this on how to invest how to how to really look at life through a different lens. One of my favorite things a mentor says to his mentor is about assets and he just kind of puts it in a different frame. He's like, you know, assets is are anything that will provide you income, or better health or happiness or two time and liability is anything that detracts from your income, or your health or your happiness or your time. So it's kind of a cool that type of perspective is this mentor is like, he's the me I hope to be in the future. He's that in that wise investor who's you know, he's got it all together, he's got this sage advice. He's very stoic, but he shares these lessons. So it covers the journey of five years of when they first met, and Ryan Brooks is struggling and just doesn't know what to do and it shows five years later, what happens and how he becomes wealthy in more ways than just money. I love it in money, too. Michael: I love it. I love it enrich. Where can people find the book? Rich: It's on Amazon, all major booksellers, published through Rich Dad advisors. So Robert Kiyosaki wrote the foreword for me, which I'm very grateful for… Come full, full circle, right. Michael: Totally. Rich: Yeah. So it's on Amazon. It's called the wise investor. Subtitle is a modern parable about creating financial freedom and living your best life. I got the cover right here. So it's out on eBook. This is what the cover looks like. Perfect. So it's out on eBook. But the printed version, the hardcover and the audio book won't be out until August and it's because of just like real estate supply chain issues. There's not enough paper at the printers, so it's a long wait six, seven months now to get a book printed. Michael: Holy smokes… Rich: Isn't it wild? Michael: Yeah, okay. Well, I'm interested, get your order in now, because it might be a while. Rich: Right, yeah. So hopefully it all comes out in August. Hopefully it comes out earlier in August but yeah, and the audio book was, that was a fun challenge for me. Big goal, because, you know, it's a story and there's 10 different characters, females, older people, young kids, so I had to become, I had to learn some voice acting skills over the period of a couple of months and really practice it. Oh, how can I think I pulled it off, we'll see how the reviews are. Michael: Right on. That's great. Well, Rich, I'm curious to get your opinion on something because you're a coach, I will also work as a coach and there are folks out there that say you can take the horse to water, but you can't make him drink and so thinking about kind of the Henry's out there, and I think a lot of our listeners might find themselves in this boat, too. They have friends, family, folks around them that don't get real estate investing, right? I have a six figure job, I got a great job, why would I bother investing, I can make more money at my job. So what do you say to all those people and really, how do you position investing in general or real estate investing specifically to the people that think they haven't really good as things stand? Rich: Yeah, I mean, first of all, you know, as a coach, I'm going to help point out what is good first, you know, this is the way I coach, the gratefulness piece and, you know, it's like, well, you know, be stoked on that six figure job, or whatever it is and it's about creating freedom and so many people don't have that freedom and that's what the Henry's don't have. If they have a short runway, if they stopped if they lost their job, which we've seen happen, they don't have many months left of cash flow, to be able to live their lifestyle, or any type of lifestyle. So that's the biggest thing would be that, do you want to create freedom for yourself, and not have the stress of losing your job, or wanting to move to a different job, if you're not loving what you're doing, a lot of people stay trapped, struggling, just trapped in their jobs, because it's like, this is my income, this is the way this is what I need to make ends meet. So that's the biggest thing, it's really about having your money, make money, so you can create freedom in the future freedom of time and everything. I think that's the biggest one and then so then flipping on the other side, there's something too about America, in the world that we are preprogrammed. When we think invest, we think stock market and you know, I have nothing against it and Kathy and I are and my wife and I are invested in the stock market, but our major focus and the big aha, back through that story is, you know, we were doing that we were contributing to our IRAs and, you know, doing everything we were supposed to do investing in the stock market. But when we learned about leverage the power of leverage and how you can like 5x your money, just through the power of leverage. I mean, that's a standout and that's one of the lessons the mentor goes over in the book. He, he has Ryan compared to say, say you have $200,000 to invest and you invest 200,000, and gold, you put 200,000 and you buy, you buy maybe 400,000 in the stock market on that, you just leverage it and then you invest that same amount into real estate and then he kind of plays it out over five years, and over 10 years, sorry. So he's like 10 years later, and he said, so how much would the gold be worth at the same appreciation that's gold has been at and they look at that outcome and he said, oh, now let's look at your stocks and he looks at that. It's like good, he's got a decent return. Another investment, you know, he's got home and he's like, almost tripled his money but then the real estate, he looks at it, and he's 5x his money and more and then he's like, and that doesn't include the cash flow. It doesn't appreciate all the depreciation write offs and the tax benefits. So it's kind of like an eye opener to be like, oh, wait a minute. Now I see the, you know that the angels sing about investing in real estate and all those amazing, amazing benefits. Michael: Totally, totally. Yeah, that makes that makes complete sense and curious, rich to get your thoughts on when looking for a coach because I think that that's something that some people have trouble wrapping their head around, it's like, oh, I you know, I don't have a coach in life and so I would never be inclined to go get a coach or pay for coaching and so if people are inclined to do so if people are okay, accepting that, what are some things they should be looking for when selecting a coach, or a mentor or whatever, you'd have someone to help walk them through their journey? Rich: Yeah and that's a great question. It's like, I'd actually like to start step back a little bit, because you said what if they want to coach I would even go as far as there's a lot of people that I meet who say, Why do I need a coach, you know, I can hold myself accountable. I, I know how to set goals. I know how to go after what I want and everything in so why would I… Yeah, like you said, Why would I even pay someone or do anything like that and it's, you know, it's that age old metaphor or an analogy of an Olympic athlete, right? Did they get to the Olympics without a coach? No, you need someone to point things out. So for me, I know the power of coaching has been incredibly amazing because I have a coach to basically hold up the mirror to ask me the questions that I'm not asking myself, to help me look at myself and be like, you know, asking those tough questions. How are you operating? Are you being your best self? Are you, where are you getting in your own way? What's that inner Gremlin in your head saying to you? What's your limiting beliefs and what are you going to do here, what and look at new perspectives, new ideas. So there's a power in that, that it's called, I'm certified in CO active coaching, which is two people, you know, when you come together, you come up with ideas that you neither would have thought about their own? So that's another powerful piece of coaching. So that's, that's the first part of my answer and then the second part is, when you're looking for a coach, I think it's really what you're looking for. So are you looking for a mentor, which is I think, different than a coach, a mentor has kind of been there, done that, just like the mentor, and in the book I wrote, he's been there and done that. So he can say, if you just do what I did, you will be where I am, which is awesome, and very valuable and that's a mentor and I think some people are looking for training and consulting, where they sign up for a coaching program. But it's more about teaching to learn a specific skill and that's very valuable to so and then the third one would be looking for a coach who's more like that coactive approach where it's someone who I first shared, and what I've gotten from coaching is someone to ask the most powerful questions, someone who's intuitive, someone who can really help you shift your mindset and be your best self and operate at your best self. So that would be a another type of coach or a peer coach in my eyes and sometimes it comes together, you know, I'll say to my clients, do you mind if I throw on my consulting hat right now or my mentoring hat? So they know that I'm stepping out of that coat peer coaching role and be like, you know, I've invested in real estate for a while I can give you some advice here, I'm not going to have you, you know, go and search it and try to learn it elsewhere when I've got it right here, and I can share it with you. So I think that's it, it's like looking for what is it that you want? What are you looking for and that would be the first thing and when I was interviewing for a coach and looking for I've had several coaches over the past 25 years, when I interview a coach, I'm always coming from the place of like, what's the vibe? What's it feel like to be coached by this person? Do they? Do they ask powerful questions? Are they really hearing me and are they into my vision? You know, I think the biggest thing would be connecting with that coach, and really, really noticing, like, is this coach, really seeing my vision? Do they really get me who I am and what I want what's going to help me be fulfilled in my life, and in my career, and it's just a sense thing. So you can get that sometimes you you're talking to a coach, it's like, oh, this guy's or gals just coaching for the money, you know, just looking for another client. Sometimes you talk to a coach, it's like, wow, this person is really like, wants to coach me on their ideal client and so you can sense that Michael: Interesting and how should people be thinking about it for themselves? If maybe they're not sure if someone is just getting started out in this journey, they know they want to invest in real estate, that's the goal but they don't know how to approach it to the to coaching and mentoring a consultant. I mean, what are some questions that they could be asking or things they could be thinking about, as they're starting? Rich: That process gets great, I mean, experience, I would ask for experience and you know, I think it's great, you can find you can definitely find a coach, you know, or whatever they call themselves. They might call themselves a mentor, but it's like asking those questions. and talking to that person, just you know. So here are some of my goals. I know that you invest in real estate, can you tell me about your real estate background? What's your investment, investment philosophy? What have you invested in and I would even ask the coach, you know, what's been your biggest challenge your biggest failure as a real estate investor, you know, get see how vulnerable and real they are and if they're willing to, you know, to share that, and what's been your biggest, you know, what's been your biggest win as a real estate investor and what's your greatest strength? So I would ask some of those questions of a coach and then also like, what's, where do you I mean, real estate investing so broad, right and so it's like, what do you specialize in? What do you know best? When it comes to real estate investing? Michael: Yeah, I love that. You mentioned tell me your biggest failure, biggest flop. I had a mentor back in the day, and he said, I don't trust anybody without a limp. Yeah, because like the people that have only had successes don't know how to do save no right to ship when things go sideways, and they will go sideways. Rich: They will, they will. Yeah, I know that people who got into real estate in 2010-2015, who are just, you know, knock it out of the park, and they think they're, you know, superheroes. Sometimes I'm like, oh, careful, careful Michael: We are all superheroes in this, you know, the last decade. Rich: Exactly. Yeah, yeah. Michael: So Rich, talk to us a little bit about what you've seen. Some of your coaching students or mentees get right and what have they gotten wrong because you really we have the beauty of hindsight now… Rich: When it comes to investing, specifically? Michael: When it comes to investing specifically… Rich: Yeah, wrong and it's the same mistakes that Kathy and I made too. And it's that you try to talk people out of it and it's like buying an overpriced property in a non-landlord friendly state that is maybe slightly negative cashflow, or just breakeven, and they're looking at and say, but look at how this is appreciating in five years, it's going to be worth this much and it's like, no, so honestly, that's the biggest mistake I can see and I can see it in single family all the way up to multifamily. You know, just speaking at these conferences and meeting with a lot of people are doing multifamily. They think they're superheroes. They're doing this short term, short term lending short term loans, and bridge loans and really dangerous stuff at this time in the market because it's what's worked in the past and they think that they just like, Well, yeah, it's like, I know, this is a I know, it's only a you know, 2% cap rate, but that's okay because, yeah, just a one in three years… Yeah, exactly, so there's something there's something about, there's something about that. Yeah, it's just it's fundamentals, I think that's what it is, is comes down to investing fundamentals and that's what we preach at our company. It's how we help our investors, it's just really coming back to the fundamentals. Make sure you're doing it right. Michael: Yeah, that makes sense and what about the other side of that coin for the folks that you've really just seen knock it out of the park? What are they doing and you can't say the fundamentals, you have to pick a different answer go? Rich: That's great. I love that. Agreed, yeah, what value is that? Really, it's the people who, what I've seen, it's the people who take the long term game plan to the boring investors, the ones who are not trying to do this rapid growth, and trying to 10x their portfolio or 20, exit, or whatever it is. So it's keeping that long term perspective and just, you know, making sure that you can control the properties through any type of downturn and so the lessons learned that that, you know, being going through the whole recession, the Great Recession, and the whole mortgage meltdown, and all that big lessons came from that and so that it's the people who take out long term, continuously reinvesting to so it's like, you start this small, small portfolio, whether it's passive or active, and then you just start expanding and expanding and expanding it and I would say, it's the people who focus on the overall cash flow, not just I mean, brink weaving into appreciation, but looking at it, like five years from now, this is what my portfolio will most likely be doing based on everything, even if there's a recession, or whatever and then looking out 10 years and looking at it 15 years. So it's that big picture and then reinvesting. The opposite of that would be someone who's I have some friends who were only flipping, so very transactional, and they had to find the properties either flip it and that's where their income was coming through into constantly flipping it and they adjusted the wise ones and the smart ones adjusted and switch to the bur stead strategy and so they started to find these properties, fix them up, but then they would hold them and rent them out and now they're the ones that have amassed a good amount of wealth, whereas the other people who are flipping are still in the transaction game. Michael: Yeah. Ah, that makes sense, that makes sense. Okay. We've had a pretty good debate on the show over episodes about something called an alligator, which I don't know if you know Michael Zuber at all he's an author of one rental at a time. He's a good friend of the podcast, but in his definition alligators any property, that's negative cashflow, you have to feed it every month to keep continue owning it. So as you're talking about big picture, are you okay? If you say for instance, take out a cash out refinance a property to make that property a go negative, but to buy property B and now your global cumulative cash flow is greater than that a property a alone. Rich: I'm in the camp of no, don't, do not no, no negative cashflow and negative cash flow and I'll be completely honest and transparent that the house at Kathy and I were in in Malibu before this, we bought it, we fix it up, we bought it for $747,000 in Malibu, which is rare, hard to find, it's like unheard of. Yeah, it was like it was a one bedroom, one bath built in 1927 and we had to completely gutted it and rehab and we put about 300,000 into it and then we didn't get permits. So we got busted in that process and now there's still a lien on title from LA county building department and so we can't sell that place and we can't even get a refi until we get those liens off title and get it all permanent everything which is a, that's a whole different stories… Michael: Trying to get us to do an entire podcast series… Rich: Coastal Commission and all that stuff. So oh my gosh, so we have a tenant in there and it's slightly cash negative cash flow. So that's like 150 to 200 a month negative cash flow. So being completely honest, we do have a negative cash flow, it drives me crazy and that house has gone up probably $400,000 over the last couple of years in value. So we could look at it that way. But we can beyond that everything that we hold is positive cash flow, even if it's just like $100 a month positive. That's fine and if we're going to do a cash out refi we make sure that it's appreciated enough where we can do that cash out refi and not have the loan payment, PTI go over what we're gonna get for rental income. Michael: Yeah, makes sense. Well, I appreciate you sharing the misstep and the vulnerability here on the show but it wasn't intentional, that was just a series of consequences. That hadn't be negative. You wouldn't you would intentionally do that. Rich: Yeah, we did bring it on ourselves and but yeah, wasn't intentional. We didn't want to get caught. Michael: I've played that game before, too. It's a risky one. Rich: It is. Yeah, so you're always looking out the window and yeah… Michael: Who is coming in, roday gonna be the day get caught o maybe tomorrow? Rich: Exactly. When we were almost done. We were building the final deck in the back and all of a sudden, this building inspector shows I'm investigating you because one of your neighbors called… Michael: I was gonna say but it's probably one of your neighbors. Rich: Yeah, because it would make the cut and concrete and it was so loud or for the whole week. I think it just drove this neighbor crazy and so it is what it is. Michael: As soon as a quick aside one of the other hosts on the show with me, Tom he, one of his neighbors called on him he was adding an offer a small prefab office in the backyard of his property. neighbor called he gets in trouble. Same thing didn't pull permits. So now he's going through that whole rigmarole. But the funny part is the neighbor that called Tom found out that their fence is on Tom's property, it's on the wrong side of the property. He's like, thanks for calling and alerting me to that little fact. Michael: Unbelievable. Rich: So he's, he's playing that game. How do I how do I want to you know, play my next hand? Rich: The revenge game… Michael: That's it, that's it, best served cold on ice. Okay, Rich. Let's wrap up here. I'm curious to get your thoughts. We are in this very unique time in our economy in our market in this country and I'm just curious to kind of get your thoughts on what are you doing, personally as an investor and what are you doing in your business and what are you telling your students to do, as well? Rich: Absolutely, yeah. I have the benefit of being married to Kathy Fettke, who has been around for a while she's on the on the market podcast on Bigger Pockets and so she's constantly doing her market updates every year, she does predictions and has done that for the last 15 years and then at the every quarter, she doesn't investor update and at the end of the year, she puts herself on the line says okay, here's what I predicted back in January. Let's see how accurate I am and yeah, and she's been really good. She's like almost 95% on her predictions, which is awesome. So I just listened to her. You know, she's always interviewing experts and she's connected with like John Chang from Marcus and Millichap and so many just, you know, experts, as I said, with Kiyosaki and all that. So what she's saying I'll just speak, you know, because I get to hear through her office door when she's doing all her interviews and everything she think He said interest rates are not going to go up that much more, maybe even dip a tiny bit for mortgages, and then maybe level off. But even though the Feds gonna keep raising the rate, the lender and great mortgage rates can't kind of withstand that going up too much. So she thinks mortgage rates are going to hold around where they are and then there's such a glut in such a need for properties and not enough inventory. It's like a whole different world than 2008-2009. So yeah, I think we're, it's estimates are between three and 5 million homes shy right now, for housing units. So inventory still low and also, there's that whole thing where people are locked into these amazing interest rates, so they don't want to sell. So they just, it doesn't make sense to sell something and when you got a 3% mortgage or lower and go into a higher mortgage, so the real estate is gonna hold strong is what she's predicting, it's even going to increase a little bit rents are even going to increase a little bit surprisingly, even with, with the economy and inflation, rents are still gonna go up a little bit, that's her prediction and then a recession will hit well, most likely, sometime around late 2023, early 2024 but it will be a mild one, just kind of more of a correction that that's needed. Michael: Okay. Okay and does either her or you think that there will be any kind of pullback in demand as folks go back into the office or are we going to be seeing remote work kind of indefinitely, which I think was a big driver of that single family rental demand? Rich: Yeah, that's a big one. Yeah and the cool thing is like, we have teams that are like the boots on the ground. So there's different 15 different property teams in our company that find properties and so and we just did a mastermind with them in Tampa, Florida and we spent two days and we really talked about all this exact same stuff. So it's, it's something around not like a big hit on it. There still will be some availability, but not much different than if you look at today's current market right now is not going to be a lot different than that over the next year and a half. Michael: So for instance, we don't expect there to be much pullback in terms of demand. Dude, because we're expecting people to continue remote working basically… Rich: There's definitely a return to the office. There's there are definitely companies that are saying no, it's time to come back now that we want to look over your shoulder, we want to hold you accountable and all that stuff. It's so funny, because it's like the surfing lineups are getting a little bit lighter thinning. So funny. Go Oh, it's like why are so many people surfing? Oh, they're supposed to be orange. They think they're working. Their bosses think they're at work right now. Yeah. So I'm seeing a pullback there. So that's my gauge. Michael: So funny. Rich: Yeah, but not as much. There's definitely, with so many people how they've learned to use Zoom and GoTo Meeting and being remote and all that stuff. It's we're in a new world, there's no doubt about it. So I think there's going to be a slight pullback on buyers and transactions and all that. As far as the rate, but it's still not going to it's not going to drop to like dismal levels. Michael: Okay, sweet. Well, we will definitely have to stay in touch and see how you do how you and your wife do on those percentages. Rich, this has been so much fun, man. Thank you again, if people want to learn more about you want to learn more about real wealth, where can they do that? Rich: For the book? Like I said, it's on Amazon or if people want to learn more, before they buy it, just go to https://realwealth.com/the-wise-investor-book/ and then our website is just simple, real wealth: https://realwealth.com/ Michael: Perfect. Alright, thank you again and I'm sure we'll be chatting soon. Rich: All right, man. Thank you, it was fun. Michael: All right, everyone a big thank you to Rich for coming on. Super, super insightful. I know I learned a ton as a coach myself in what to look for in a coach and mentor going forward as well. So as always, thank you so much for listening, and we look forward to seeing the next one. Happy investing…

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How to acquire rental properties remotely with Kori Covrigaru

Play Episode Listen Later Jun 16, 2022 31:58

Kori Covrigaru is the Co-Founder and CEO of PlanOmatic. PlanOmatic provides quality photos, floor plans, and 3D to the single-family rental industry with speed and at scale, nationwide. With an unwavering determination for client success, he has created a team that thrives on the core value of together we win. With a national network of 200+ contractors and more than 40 employees, Kori has met the moment with the unique value proposition PlanOmatic offers through technology combined with data to support their clients' goals. Today, Kori shares what he's doing as a remote investor in the single-family rental space with a fund that he started with some of his colleagues. Episode Link: https://www.linkedin.com/in/koric/ --- Transcript Before we jump into the episode, here's a quick disclaimer about our content. The Remote Real Estate Investor podcast is for informational purposes only, and is not intended as investment advice. The views, opinions and strategies of both the hosts and the guests are their own and should not be considered as guidance from Roofstock. Make sure to always run your own numbers, make your own independent decisions and seek investment advice from licensed professionals. Michael: Hey, everyone, welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum and today I'm joined by Kori Covrigaru with planOmatic and he's returning to the podcast not talking about planOmatic, but actually to talk about what he's doing as a remote investor in the single family rental space with his fund that he started with some buddies. So let's get into it. Kori, what's going on, man? Welcome back to the podcast, thanks for taking the time to hang out with me. Kori: Always, always excited, Michael. Michael: This is gonna be a lot of fun. So the last time we had you on we were talking about your company planOmatic and for anyone who missed the episode, give us the quick and dirty, what is it that you all do and how you're disrupting the industry? Kori: We helped at the beginning of this industry. So back in 2012, we started out with the SFR industry but we've been playing thematic creates professional photos for plans in 3D for the single family industry at speed and scale nationwide. So that's what we do plain and simple, we are the boots on the ground that go out, take professional photos, do 3D scans, export floor plans from that, and then deliver that media to our customers. We try to do it under two and a half days and we're pretty damn close to it. So that's what we've been doing, we help these REITs institutional investors in smaller companies scale from 5000 properties all the way up to hundreds of 1000s. That's our business, that's what we're here for. Michael: Amazing and today, you and I are here to talk about something a little bit different kind of related. Yeah, but really, it's about your journey in the SFR space as a remote investor. Kori: Yes, sir. So, you know, just being in this industry for so long. I'm surprised it took me so long to decide to get involved on a higher level. But yeah, I've been just watching, you know, myself and some people that I work with here and some family and friends outside of here have been watching this SFR industry grow to the level that it has and never really gotten involved on the investor side. I mean, I had rentals on my own. I've had a rental, you know, my first rental I bought with my business partners. I want to say it was 2006 I think it was October 2006 or 2005 and we bought a rental out in Grand Rapids, Michigan. Since then we exited that then I had a couple rentals here in Denver, but nothing remote and nothing to the level of what we're building right now with SFR Emo, that's the name of the partnership, the group that we've established with 13 partners, and we all threw in some cash and have been acquiring homes, single family homes, for, you know, residents to live in and Alabama, of all places Birmingham, Alabama. So that's what we've been doing, yeah. Michael: Interesting. So you've done the local investing local with you in Colorado, so what I mean, what did you eat? What did you drink that decided, hey, I'm gonna go do this crazy thing and invest where I don't live. Kori: I ate and drank reports for where our customers are buying real estate and where it made sense and just reading articles. I mean, there's so many great content distributors, you guys included in terms of what markets make the most sense what to look for in a market and so I had been immersed in all of this data and all of this information for so long, that I finally pulled the trigger and said, hey, time to form a partnership. You know, we started out with five partners, that was the deal was gonna be five partners no more and then, you know, I don't know if you've ever been involved swings. But what happens is you start getting phone calls from random people saying, hey, I want this thing going on, like I want and why didn't you invite me? It's like, well, hold on a second, like, first of all, I don't I don't know how you found out within second. Like, it's this really small thing we're doing and so it went from like five partners to 13 and we had to like, we had to cut the investor pool out at that point and build with what we've had what we have right now, because we still haven't, you know, deployed all the capital. So it started, I'm starting to understand why we see billions of dollars come into the industry committed to buying SFR is, but it's very slow to deploy and so we're experiencing that right now. I mean, we're not slow to deploy, but it takes some time and so that's kind of how the idea started. Yeah, just get involved eat your own dog food, as they say, I think right, that's the term. Michael: That's it, that's it. So Kori, I mean, you just went through, I think what so many newer investors really struggle with, and that's picking a market and talk to us how I mean, what are these reports showing? What were they telling you and also like, how did you settle on Birmingham because I'm sure the reports show that there were really a lot of other great markets to invest in, too, yeah. Kori: Yeah. I mean, we landed on a cut to the chase, then I'll kind of backtrack a little bit but we went with Birmingham because this is a small partnership, and we really didn't want to have to continue to put money in so we wanted to pick a market that could cash flow. We wanted to pick a market that was cashflow positive, had great cap rates, relatively speaking hearing coverage are being compressed everywhere right now as we know, cost of capital is going up, prices of homes are going up, that's actually going to reverse here pretty soon, in my opinion, we can get into that later. But so we picked Birmingham, there was a lot of economic opportunity being created there, jobs being created there but also, we knew we were going to be cashflow positive with the cap rates, and there was a room for appreciation. Plus, we found a really great property management company partner that we work with down there that can not only serve us in that market, but we can also expand to other markets, you know, with their with their support. So that those are the reasons the main reasons why I mean, we apply nomadic had the advantage, we have a critical mass of single family rentals that come in through our pipeline to shoot photos, create floor plans, you know, 3D and so we kind of have like this, this holistic view and indicator of what markets might pop off next and, you know, we use that data to make decisions for us farm on where to invest, it's a bit of an advantage that not most have, but I'll tell you what, all that data is public, I mean, we can go out there and see and look at county records and see where all the institutional landlords are the professionally managed properties are being bought and so if you dig data or like to, you know, you can always go on Upwork or Fiverr, and say, hey, please go find me this set of data, those are kind of hacks that you can do to figure out where companies are buying. Now, just because professionally managed companies are buying there doesn't necessarily mean it's a homerun, you have to do your own research, figure out what your goals are with your portfolio where you want to start. So that's kind of been our trajectory on the direction and where, where to own and operate for us. Michael: Yeah and that makes a ton of sense and I love that you said that to like, go find someone else who can kind of help aggregate the data or figure out the data for you because like, you can, like you don't have to be the person to do all of the due diligence, you don't have to be the person to do all of like the research and also you can leverage other companies paid employees, like you were just mentioning, if an Amazon fulfillment center is going in there, or like Whole Foods is setting up a new headquarters there. They've done the research, so of course, don't reinvent yourself. The wheel, right… Yeah, it's, I love it. Kori: It's out there. Michael: Okay, so Birmingham was the target. Yeah. What did you all do next? I mean, how are you executing there? I know, you said you had a great property manager, but like, yeah, the, from the physical like property acquisition to due diligence. There's so much more involved before you even own the property. How did you get that accomplished? Kori: Yeah, so we this idea came about at some point in 2020, when, you know, shit hit the fan and COVID was on the way and in my mind, and I've always been fairly wrong, when it comes to trying to predict the market. The only thing that's, that's, ya know, I mean, the only thing that's going to be successful is that there is no bad time to buy, that's just my mentality. Like, there is no bad time to buy, it's just a matter of how you go about finding those properties and what you do during negotiation, and due diligence. But um, you know, back in 2020, you said, oh, the real estate buyer is going to absolutely flop right now, everybody's, nobody's got jobs, unemployment is gonna be crazy, we're headed into this, you know, doom and gloom period, which is, of course, very wrong and we said, you know, it's a good time to buy single family rentals, rentals, they perform, regardless of economic conditions, typically, in recessionary periods, they still grow not as fast, but they do grow, that's a hedge against inflation, so on so forth and so we decided to form the entity again, went from five to 13 very quickly. But between, you know, between mid-2020, and mid-2021, I don't think we purchased a single property and so you know, we had to go through all kinds of processes, right, you have to have a good operating agreement, you have to establish a an EIN number, you have to select a property management company, you have to make sure you're finding the right tax forms, you need to find a broker, you need to do research and figure out where you want to go. I mean, that was a big chunk of our time was we didn't know in 2020, exactly where we wanted to go. So we had to do that research, we had to have, you know, make sure that everybody all the partners were kind of on board and then at some point in time, we decided to, hey, these three partners or five partners are actually gonna make the decisions. Okay, now we have to amend the operating agreement that requires lawyers again, I mean, we kind of did a lot of stuff makeshift but, but there's a there's a lot to do, and a lot of time to be had between the moment where you decide, hey, I'm gonna get into this, especially if you're remote and we just closed on our first property, right. So it's, you know, it's, it's more than you expect, but doing it right is the most important thing and I think we've done it right. So far we learned a lot along the way. But we're on the right track. I mean, we're almost at will be at 28 single family homes and that's only that's the course of a year right. So from 20, mid 2020 to 21. We didn't purchase a single home in the last 12 months we've purchased approximately 28-20 single family homes. Michael: Wow, that's so killer. So Kori I mean, I'm curious to know too. Why did you not just do this alone, a lot of people would argue well, wow, 30 people like that's way too many cooks in the kitchen or five people making decisions like it can get very convoluted very quickly are very quickly. Wouldn't a single operator be more lean and be able to move quicker? Kori: Yes, yes. I mean, well, so the short answer that is, I can't really do anything. I have a lot of really good ideas but I can't do much. So that's why I didn't go at it. Yeah, I'm the idea guy, right, and the people around me to do things. So, but no, I mean, you know, what, one big reason why we went with more just to have more capital, to be able to diversify more, you know, it's, it's risky as an individual to go out and buy one or two rentals. But if you go out with a group and buy, you know, our goal is to hit 60. That's a pretty diverse portfolio and minimizes risk and there are a lot of great minds in our partnership. I mean, we have a finance guy, right, we have a data guy, we have consultant who's seen many different organizations, we have myself, who's kind of like, overall, seeing the organization from a high level and helping with the financing part of things. So I think it helps to have different people plus, this is all you know, passive for us, right? Everybody's got a full time job and so, you know, if, if I were to do this alone, this would be a full time job, no doubt, but spreading it across having the right property management company, but this person doing, you know, diligence in this person negotiating offers in this person, making sure our bookkeeping and finances and taxes are all in line, it just helps kind of spread that out…. It's fun, man. It's more fun to succeed with partners, like I, you know, I have two business partners here at planOmatic and I couldn't imagine being a sole proprietor, it just doesn't seem as fun to me. Like, for us, it's always been the game in the chase and like winning the game, and it's, if you're by yourself winning and celebrating, that's not fun and the same goes with, you know, the lows. I mean, 2020 was a tough year right and so having a supportive business partners help. So I just think it's more fun. Michael: Yeah, that makes a ton of sense. That makes a ton of sense. I'm curious, quite, how did you figure out like, who does what, and when you were picking your partners and picking your team? What was the process that you went through to do that because I think a lot of people like, oh, my best friend, we're so uh, like, we're so similar. We think the same, we should be partners, we should be business partners. Was that kind of the case for you? Kori: You know, for me, I mean, I kind of surround myself with people that are like minded and sort of see things, you know, in a certain lens when it comes to opportunity, right? So it was actually it was pretty simple. It was more like who do we, who do we not tell, you know, and ask versus who, because a lot of people came to us a lot of really good friends. So it was just who's willing to take an opportunity who trust I think trust is the number one thing when it comes to partnerships is like, is there trust, we had to make sure there was trust there and then, and then different specialties from different people, again, like I said, like one guy is a full time controller, you know, big company, that's really helpful. Another guy is an operations guy who's operating, you know, we're shooting five to 700 listings a day, right. So like that, that really helps play into one of our guys, Tim Rose, he heads Planet Labs and we analyze and optimize workflows and analyze and optimize reports and data just based on what's coming in and so having him on board to help us decide which market to go with, or what cap rates to focus on, I mean, that was helpful. So it kind of this one all came together and then the people that wanted to be involved, they kind of like stepped forward said, hey, I'd like to be more involved those that didn't, are just passive for this particular partnership. I mean, one of the, I don't want to call them mistake, but it was a rookie move was like 13 partners all equally invested right and so that creates challenges for two things. One, every time we close a loan or refinance, we have to get 13 signatures and that's like, probably the biggest pain in the ass that we've got as a group. The other is like, we're putting in a lot of work on the side, especially, there's one person in particular in the partnership that puts a significant amount of work in, and his return is the same as everybody else's and so this was really like a search and destroy mission for us. Let's figure it out, figure this out, figure out a proof of concept, see if it can work and then in the next round, we're a little more educated, we'll structure the company a little bit differently, make things happen and move a little bit quicker. So yeah, that's kind of where we're at today. Michael: Okay, like with regard to that signature, and then the equity piece where what else? What else would you do differently for anyone listening? It's like, I want to do this, like, what should they be thinking about? Kori: When owning and operating and SFR funds, you want to separate out the management company from the fund that owns the properties and we didn't do that it's all one thing. So when you've got one entity that manage manages the portfolio, you know, that's where all the work is. Capital, putting in capital to buy homes is simple. You read a check and then there's typically somebody at the fund but the management company, you know, in today's world, and so far, they're helping acquire the properties on behalf of the fund and so creating an entity for the fun with limited partners, and then a property management company or management company that owns an app rates the portfolio separately, it just makes a whole lot more sense and that's really, you know, shame on me, like I've seen this, I know this, but we just wanted to get going and again, at first it was five, right. So we weren't going to separate those two out as simple as like, we can get five signatures. But when it grew with 13, it became challenging and so we'll look at that a little bit differently. Michael: Okay and have a separate management company, even though you all are leveraging a local property manager. Kori: Yeah, because there's much more that you have to communicate with the management company, you have to go through the process of buying the homes and through due diligence, and you have to make offers, and you have to make sure your books are in order, you have to file taxes, and you have to sometimes raise more capital, you have to open up a line of credit, so you can buy in cash and turn on refinance, we can talk about that, that as well. But there are a number of things hidden, hidden chores, let's call them that have to happen when you manage a portfolio, even if you have a property management coming up property management companies can help you place tenants and make sure your tenants are happy and having residents are having a positive experience. Outside of that, they're not doing a whole lot. They might help you find homes, they might help you negotiate, they might help you with renovation, but everything around organizing the company there, that's just you know, that's one vendor that you have as a part of the organization, you have your CPA, you have a bunch of different things that are you have your banker that you have to manage property manager company is not going to deal with your banker, it's not going to happen, they're not going to go find a line of credit for you like that doesn't work that way. So there are a lot of hidden chores that are in there that I strongly recommend, like thinking ahead, because it doesn't take very many homes, very many investments to need to put a significant amount of time even if it's distributed amongst partners into the operation. It doesn't it's not a set it and forget it. This is not George Foreman grill, this is like there's a lot there's a lot going on. Michael: I don't think I've heard a George Foreman grill reference. Kori: Now you have or maybe it wasn't George Foreman, maybe it was. What was that? No, it was a different one. It was an infomercial, set it and set it and forget it. Michael: Oh, that's too funny. Well, Kori talk about like the strategy because you mentioned it just briefly about like line of credit, purchasing and cash and then going turning around and doing a cash out refi. So how are you purchasing properties and how are you structuring your deals? Kori: So up until now, and oh, boy, are we headed for some news on Mays real estate market, like people aren't going to believe what they what they read in terms of percentage swings. But up until now, it's been a very competitive market for buyers. I mean, like, you know, you had to show up with cash you had to show up with, with no contingencies, waive the inspection, right. All of these things that everybody in a healthy market will tell you don't ever, ever do this you had to do over the last two years to buy real estate in some markets, you've had to do that since 2011, or 12. I mean, in Denver, for example, you know, and this is one of the reasons why we didn't we didn't come to Denver, but in 2012, we went my wife and I visited a home and we had to put an offer in same day and we thought we were crazy, right and we ended up closing about houses, it's now a rental above, you know, closing at 332 is it's probably worth 900,000 and there's a reason why because Denver has been nuts, right. So the markets been like that since then. So what we decided to do is utilize a lot of the cash that the partners put in to buy the homes in cash, make cash offers, you know, promise a quick close, because we had to win the properties and then we would turn around and take the portfolio, once it got to a certain size and refinance it with a bank, we have a great banking partner down in the southeast, and they've been fantastic. But we've always historically bought in cash and around refi pull the money out. Oftentimes, it'll appraise much higher than, you know, we initially bought it for and I'm scared to say this because it sounds so 2009. But the bank is paying us at this point to buy these homes because we're able to leverage 85% and so if they've appreciated more than 15%, right? They're like giving us cash to close on these homes that we bought in cash. Again, sort of scary to say but in terms of rentals, like we're not in danger, like they've performed fine and as long as you as long as you cash flow through ups and downs in the market and interest rates, ups and downs, it's you know, you'll end up on top, but like Denver is a crazy market. I mean, I remember I was talking about getting a single family home to rent like separately outside of SFR I think it was like two months ago, maybe a month and a half ago and I took my kids to the open house and I showed up about 10 minutes early because I had to be like a birthday party or some bullshit like that and I get there 10 minutes before and there are already eight like, like a groups touring and I'm just like, still really like in in this neighborhood frankly, like, really and so I it took me one open house so you know, I'm out of this market. I mean, I know this right and a lot of the advantage that that people will have is they'll understand the local market and understand the neighborhoods understand where are they putting, you know, new light rail estate in where's their economic opportunity. But Denver was just too competitive, you know, to stick around for. So, yeah, yeah, it's been amazing. So we buying cash, turn around refi, pull cash out, rinse and repeat sort of deal and as long as properties are appreciating, you know, it's a, it's a pretty good model, especially when it comes to rentals, you know, fix and flip, I'm not a big fan, I think, you know, someone gets caught with their hand, that cookie jar at the end of the day of fixing flips, but as long as you're keeping in cash flowing, I think you're fine. And that's, that's kind of been that's been our model and we're able to now take out a line of credit. That's, that's, you know, securitized by our portfolio. So even better, we're able to use cash and a line of credit, make sure that there's good cash flow, turn around the bank, you know, refi it, pull the cash out, and rinse and repeat and that's, that's sort of what we've been up to and you can keep doing this, depending on how the market performs and how interest rates look. I mean, you can keep doing this for a while, right. Our goal, we're at 28. Now, our goal is 60. But depending if, if things continue to appreciate, then we could be even higher than 60, depending on how much the bank will pay us to buy these homes, basically, I'm afraid to say that, should I be saying that? Michael: It sounds it sounds terrifying. But that's what I wanted to ask you. So you say they're financing 85% loan to value? Kori: Yeah, yeah… Michael: That's, like, unheard of in the investment property space it. Kori: You know, usually, here's 7525, we find a bank, that's pretty aggressive. I mean, it's not like a small lender, it's a bank, it's a legitimate bank and they've been, they've been a great partner for us, and they see the opportunity, and they're a little bit of a risk taker. You know, they're keeping these loans or not, obviously, not selling them to Fannie and Freddie, I don't think, but we've also got so many partners to fall back on, like, it's, it's not risky for them, you know what I mean, when you have, yeah, that much that much wealth behind the partnership, and I'm not talking about the individual employment as a group, like you've got 13 households, where if something goes wrong, for some reason, with the majority of the portfolio, like, they'll be fine, you know. So I think that's also potentially why they're able to leverage so much. But they also are bullish on the rental market and SFR and they understand, you know, as far as you go to a bank, let's say up in upstate New York, they just haven't been around so far, very long. So they might not be as accommodating and as flexible. But boy in the Sunbelt, I mean, banks are trying to try to monetize this just like every other individual investor and so finding the right banking partner has been, you know, really great for us and strongly recommended. I mean, that's, you know, one of the most important things, we've gone through two banks. Now, we were with the credit union before, they didn't really see the vision that we had, but now with private bank, and it makes a lot more sense. Michael: Okay. Well, that's great to know and I'm curious, when you started putting this all together on paper that was 2020-2021 and the interest rates were at three, four, maybe sometimes even in the twos. Now they're up in the five, six sevens. Has that changed your model much or really changed the performance of what you were expecting return wise? Kori: Well, yes, of course, right. Cost of capital is it's real, it's real thing for individual investors who are buying their primary home, it's a real thing for smaller investors, family office all the way up to up to the REITs and the institutional landlords. So everybody's feeling a squeeze with those interest rates, cost of capital, obviously, going up, cap rates being compressed. I think what we'll see and what we've seen, historically, is that rents keep up with interest rates, right? So we'll see, you know, rents have gone up, I think, year over year 16%, I believe, and so far, we'll see those continued fact check that before you post it, but I think I saw it in the Wall Street Journal and so rents kind of keep up and so that's, you know, we have that to look forward to in terms of paying more for capital. But also, you know, the goal is to cash flow through the periods through the ups and downs, right through the different markets and so foreign investors, you'll see, you know, we borrow at five and seven year, seven year loans, right, so we're not in it for the 30 year fixed and so that should take us through any sort of period, right? We should be able to refinance within the next seven years, again, hearing things from 2008, kind of reverberate in my head. But that's the idea is that if as long as you can cash flow through interest rate periods, you should be fine and as long as rents hold up, which we don't see any reason why they shouldn't. I mean, we're again, four and a half million homes short of supply right now supply is not going away. Now, home values have gotten to a point now where buyers have said I've we've had enough, we're not we're not doing this anymore. Besides the fact that we can't afford it, right. Like between the interest rate hikes and the appreciation of home values over the last two years, we're seeing about a 43% increase in cost to pay a mortgage. Okay, like that's insane, so… Michael: Compared to when? Kori: Two years ago, that's compared to like beginning of 2020. I mean, between the appreciation and the interest rate increase, going from like three on average to five whatever and a half, one would be 43% more expensive to make mortgage payments today. Now, the good thing for SFR and for rentals is people are still there's a high demand for spacious, professionally managed homes, right single family rentals, and that demand isn't going away. So when people can't necessarily afford today to buy a home, or maybe say, hey, I'm going to sit on the sidelines for a couple of years, because this is batshit crazy, they're going to rent, right and so the demands keeps up, the rents keep up inflation continues to go up and hopefully we'll see that slow down here, due to the increase in interest rates. But you know, cash flow is important, I think it's been proven over time and history that rents will keep us cash flowing and that's why the industry is so attractive and so, you know, so new still, we're only a decade into this being professionally managed, right landlord has been around for before we can remember. But there's an appetite for professionally managed properties, so that the experience that I'm gonna have, as a renter as a resident is on par with if I own my own home, and was able to do whatever I wanted to do to my home. Now I can have that luxury of having that home, but having it professionally managed. So if things go bad, I can just call someone, they'll be here soon to fix it right or if I want to move, it's not it's not that big of a deal on my lease ends, I go find another lease, right. So that demand isn't going away and that's what's keeping us so strong as an industry and I was just at the National rental home Council conference in DC and that's kind of the theme is that, you know, everybody's cautiously optimistic, because it's a weird time. There's a lot of uncertainty right now in the economy. But there isn't a whole lot when it comes to our industry and so I think, you know, again, when is it a good time to buy, in my opinion, always. So what's happening right now is interest rates are going up, prices are still like going up. We are seeing I think a Redfin report came out today that prices are starting to come down, actually and so there's a huge opportunity for investors to get into the market right now and buy, and investors don't have to buy at this price. Like it's been only a month, but the whole thing has been flipped upside down. So what I'm telling my acquisitions team, right, my expositions team, is, this is a time where, frankly, you go in and you offer 15 to 20%, less than what it's listed for, and you offer on volume all of a sudden, and then those that are willing to get out with a cash offer today, those are the deals to be had and yes, you are paying a higher interest rate right now for that. But you know, what, if you get the deals, and I'm not saying you'll get them at 20 or 15% discount, but you'll get them, you don't have to pay this price today, because the market just hasn't adjusted down to the interest rates that we're at. There are some steals out there and so it's a volume game, right? It's like, it's like going to a bar and meeting men or women, right. The more the more you ask, the better chance you're gonna have to succeed and it's the same with real estate today, like the more offers you throw out there that might be less than what they're wanting or hoping for a price. Some are in a situation where they need to exit or want to exit and so there are opportunities out there more right now than ever so far, which is crazy to think about. Michael: That is crazy to think about and so you mentioned there's some big news coming out was that was that the Redfin report about where you think prices are going for the May report? Kori: No, well, I mean, there was there was some information out but we're still they're still reporting on April, my mind, this is just, you know, my prediction is crystal ball, my crystal ball tells me based on very, you know, various different data points that may will be the biggest drop in transactions we've ever seen the biggest drop, the biggest drop in transactions month over month that we've ever seen, I'm predicting, I'm putting it for… Michael: May 2020. Kori: To May over April and may year over year, also that will be the biggest drop in in housing starts as a percentage and let's say close transactions will be in May, that'll continue into June because there's always a lag housing starts we get at the beginning contracts to buy new construction, we get the beginning. So that's always an indicator, a leading indicator of where the markets headed. But we'll see that as built, you know, are already built on existing home sales. They're just going to plummet right now and that's because there's pretty much gonna be a standoff between buyers and sellers right now. I mean, when do you remember seeing homes drop in price in Denver like, right, I don't remember when that happened. Yeah, you know, so I think that I think the buyers are fed up. I think that affordability has gone through the roof and I think that the Fed is going to succeed and installing the economy and stalling you know, the housing market, which has a trickledown effect to the rest of the economy, right. I mean, think about movers, Comcast, right, any sort of cable television, Home Depot and Lowe's, right, all these all these companies that we don't really think about. or Amazon people buy stuff for their new home like the Fed wants to slow the economy down, they're definitely going to succeed. We're going to see some job loss from it. But at the same point in time, this is an OK, adjustment to the overall market and the housing market. We know that this is not sustainable. We said that a year ago, a year into this crazy Rock chip ride. So we'll see a slowdown and it's healthy, it's okay and that also creates these deals that I think are definitely still out there. You know, there are still motivated people that need to sell for one reason or another. Maybe they have to move, maybe they are they're adjustable rate mortgages off, right, maybe they set it seven years ago, and all of a sudden, they're having to refinance and it doesn't make sense. Maybe they just feel like they want to cash out and it's time and so, you know, those who went under contract, let's say a month ago, kind of probably hit the top. But for the short term, but there's still a lot of opportunity out there to get some good deals right now. Michael: You heard it here first, folks. That's awesome, that's awesome. All right. Well, Kori, we got to get you out of here, man. Thank you so much for coming on again. For people that want to reach out to you connect with you learn more about planOmatic where's the best place for them to do that? Kori: LinkedIn is great. Although my name is hard to find K O R I C O V R I G A R U, I'm sure it's in the in the post, LinkedIn is great. My email kori@planomatic.com, I'm always fielding emails. So send me an email and otherwise I'm not I'm not really on Facebook or Instagram or any of those, so email and LinkedIn is probably best for me. Michael: Right on that'll have to do. Well, Kori thanks so much, man. Appreciate you coming on again. We'll chat soon, all right. Kori: Thanks, Michael. Great to be here. Michael: All right, everyone. That was our episode, a big thank you to Kori for coming on and sharing with us what he's been doing in the space. As always, if you'd liked the episode, please feel free to leave us a rating or review wherever they as you get your podcasts, and we look forward to seeing on the next one. Happy investing…

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Find deals that work for you and invest with confidence w/Tamar Hermes

Play Episode Listen Later May 10, 2022 31:32

Tamar Hermes is a full-time real estate investor and educator. After building successful businesses in the retail and entertainment industries, she turned her attention to real estate with a mission to get more women to become investors and continue to build her portfolio. Tamar has been investing for over 20 years with a focus on appreciation with buy and hold single-family homes and duplexes in Los Angeles. In the past few years, she has expanded her portfolio to include passive multi-family investments across multiple states, private lending, and Airbnb properties. She bought her first duplex when she was 28. She always had a knack for saving money, but it took her years to discover there were other ways to earn income besides working a 9-5 job. Today, Tamar will talk about how financial freedom is possible through real estate and the importance of knowing how to allocate and invest your money and protect assets is a critical piece of sustaining financial independence and creating a legacy. Episode Links: https://www.themillionairessmentality.com/ https://wealthbuildingconcierge.com/ https://quiz.tryinteract.com/#/60bd0792decf1d00177af595 --- Transcript Before we jump into the episode, here's a quick disclaimer about our content. The Remote Real Estate Investor podcast is for informational purposes only, and is not intended as investment advice. The views, opinions and strategies of both the hosts and the guests are their own and should not be considered as guidance from Roofstock. Make sure to always run your own numbers, make your own independent decisions and seek investment advice from licensed professionals. Michael: Hey everyone, welcome to the Remote Real Estate Investor. My name is Michael Albaum, and today I am joined by Tamar Hermes, who is an author, investor, coach, an all-around awesome person and she's gonna be talking to us today about what it's like to get started, as well as some of the different avenues that investors can take as they're going down their investment journey. So let's get into it. Hey, everyone, just a quick note, before we get into the episode, today, I wanted to give a shout out to the Roofstock Academy, which can be found at roofstockacademy.com. It is a one stop shop for your real estate investing education, independent of where you're starting from whether you're just starting out trying to get that first deal done, or a seasoned investor with a sizable portfolio, looking to get involved some other asset classes, or maybe streamline your investing. We've got stuff for you. It's comprised of on demand lectures, so you go at your own pace. Some of our programs have one on one coaching access to private Slack channels, forums and group coaching sessions. So come check us out at roofstockacademy.com. Look forward to seeing you in there. Tamar, thank you so much for taking the time and joining me on the podcast. Really appreciate you coming on. Tamar: Thank you so much for having me. Michael: Oh, my pleasure, so I know a little bit about your backstory. But I mean, you're an author, you're a coach, you're an investor, give us the little background of who you are, where you're come from, what it is you do in real estate. Tamar: How long does this podcast? Okay, in a nutshell. So my background is similar story, as a lot of investors that start out in real estate, I was looking for a way to lower my expenses and so I bought a duplex over 20 years ago and the rest is history, I realized that I could get other people to pay my mortgage and it was very exciting and I went on and did more of it cut to I did grow up without anything. So I wanted other women to realize the opportunity in real estate and that's when I started wealth building concierge. I recently wrote a book, the millionaires mentality to teach women how and men too actually should say, how to invest in real estate and the many ways in which you can do it and the many ways to build wealth through real estate. Michael: Oh my god, I love it. Well, there is a ton here to unpack, we'll see how much we get through in today's episode. But so the duplex that you bought, you obviously bought it locally because you were living in it, and your future investments and kind of proceeding investments after that were those local or those remote? Tamar: So when I first started investing, many years ago, in Los Angeles, I was living in the duplex and so I bought there, and I continued to buy there because we didn't I didn't have the resources that we have now and I didn't realize the opportunities of investing out of state. Over the years, I have investments across the country now and I also invest in both passive and active meaning that passive that I give money to partners and they do all the work and I get a piece of the pie active where I do the work and I take advantage of the real estate professional status and get to enjoy all the perks of controlling my own asset. Michael: Love it, so on the remote real estate investor podcast, we've often done showdowns between single family versus multifamily passive versus active investing and we try to take a stance and defend both positions having done both, which do you like better and why? Tamar: I will say that I enjoy both for different reasons. I enjoy both passive and active. I ultimately like passive better because passive is where you're on the beach in Hawaii, drinking a Mai Tai while you are collecting checks, so that kind of trumps everything. Although active gives you tax advantages, it gives you more control over your investment and it is a way in which you can also learn a lot more about real estate investing because if you're passive, you need to learn a certain skill set in terms of looking at analyze a deal and how to vet a sponsor. However, you don't need to know all the ins and outs of how the property management works and the ins and outs of negotiating, finding the deal. Dealing with the tenants all of that those aspects. So there's a different, it depends on what you want to accomplish as part of my whole platform, where I feel like right now we're in a time where real estate investing is very popular, which I'm so grateful because there's enough for all of us, and we can all make a lot of money have owning real estate. What I do get concerned about is that there's not a lot of thought or strategy around what we're buying. So a lot of investors now they might say, okay, I want to buy Airbnbs and the goal is to cashflow 10,000 a month. Well, that's a great goal and that's wonderful. However, what is the big play in terms of the Airbnb and where are you really going with that and what then is the property appreciating or is it just in a market where it doesn't appreciate? What happens if the market changes and will that place still rent as well or do you have to turn it into a long term rent and can you can it? Can it take the that strategy? So there's a lot of pieces that I like to think about in terms of mitigating risk, and in terms of wealth building in terms of how do we build a portfolio where we have passive income, where we have certain assets, performing in certain ways and other assets performing in certain ways. And I'm also in private equity deals, I'm in crypto, I like a diversified portfolio. Michael: Love it, love it, love it. So if someone is just getting started, they are trying to get their legs under them invest in their first deal and they're getting kind of overwhelmed with the amount of stuff that you have to learn and do to get involved into an active ownership deal. Do you think passive is a good place for someone to get started or do you like people to see, go the active route, get their teeth cut, get an education to understand what goes into the back end stuff around the passive deal? Tamar: That's a great question. I think it really depends on one big factor, which is how much time do you have, if you are a busy professional, and you are working or running companies, and you're not really that interested in real estate, but you want to benefit from the profits that are available to you, then passive is certainly the way to go and then I would I would do is focus on that dive deep into meeting the right sponsors, finding out about how to look at the deals and learn about certain deal structure and the benefits and that is a great way to go. If you are someone who is young, you've got time you're interested in real estate you want to be in the game, get your hands dirty, then you want to be asking yourself, what is the most appealing aspect of real estate in terms of do you like and Airbnb, a lot of a lot of people don't like designing, they don't want to deal with all of the nuances and the expense sending up an Airbnb, Airbnb is expensive, there's not a lot of way around that if you're going to furnish a place, you're going to have to put money into it. So those are if you don't have that resource, then that might not be an option for you right now. Granted, if you're able to maybe do a get a property where you can get a low enough deal and get enough appreciation into it and do sort of the burr then you have the opportunity to do the option of Airbnb and because maybe you have enough money in the deal there or maybe you take a partner. So those are just examples. A very simple way to get started is even with Roofstock, you do a great job of providing turnkey properties where people can go on and figure out where they want to buy and then do a purchase and start learning that way. That's another great way, keep it simple. Michael: Tamar, I think that's such great insight and I know that you've done all kinds of investing, you've implemented a ton of different strategies, kind of throughout the country. So I would love if you could give people just a taste of some of the things that you have done and then I'm curious to get your thoughts on what your favorite has been. Tamar: My favorite investing strategy is passive investing and I'd say that as a general because any project that you can get in on where you are making mailbox money is a good project and especially when those projects exit, you get another bump and you're looking at interest returns of close to 20% generally annualized when it when it all shakes down when once a project exits. So granted, you have to remember it's it an investment, so it could vary and even if I'm making 14% annualized, I'm pretty happy. I think that's a pretty great return for doing no work and putting my money in. Now my favorite investment strategy for if you are just starting out is a little different. I would say right now my favorite investing strategy for starting out is probably the Airbnb model and I think I'm not alone and that's why it's become so popular because you can cash flow properties and buy in appreciating areas, which is sort of unheard of in the past, when you would buy in Los Angeles. Well, Los Angeles is a bad example because they have terrible laws for, for tenants. So that's not a good example. But let's say Austin, where I live now, Austin is a great city. So it is possible in Austin or San Antonio to buy a place if you if you are savvy and you can buy it right and get a great opportunity, then you can move into an Airbnb structure. Now, I should say, though, in Austin, there are regulations, so you need to go outside of Austin, but certainly San Antonio, there's a lot of places where you can do it and you can actually buy in an appreciating area in Florida and Georgia, there's a lot of places and I just think that's a great strategy for a beginner, you do need some money, like I said, because you got to furnish the place and it is harder to buy in an appreciating area, because prices are higher. So if you don't have as much money, it makes it cost prohibitive. But there are a lot of labor areas that you can go in Texas, in Florida, in Georgia, in Idaho, where you can make money and do well. Michael: Love it, so I think what's hard for so many beginning investors and curious to get your thoughts if you see the same is that there are so many different things, so many different rabbit holes, an investor can go down, oh, I want to learn about wholesaling and go through that I want to go learn about burr investing go to that I want to go into fixing, flipping, go do that and so it's can be really overwhelming. And so if someone is interested in buy and hold, or in Airbnb, I mean, how do someone stay focused when they're just learning and they're just getting started? Tamar: So that's a great question, it can be very daunting and you can also get into analysis paralysis, where you want to buy the best deal and make sure that it's the best one and you make the most money and a lot of times getting a base hit is better than getting a home run on the first go around and sometimes you're a seasoned investor and you end up with a base hit. It's happened to me, and it happens to the best of us because we can't control all the variables. So there are a couple things you want to look at if you're just starting out one is where do you live and do you live in an area where you can actually invest and it makes sense and if you do, I always think don't go to another state. If you live in a perfectly good state. If you live in South Carolina, don't go to Texas to invest in South Carolina, it's a great market, you don't need to make your life harder. So the first thing is deciding on the area. The other thing is, then you need to decide what strategy now strategy a lot of times comes down to how much money do you have and how much time do you have and how many partners can you get if you need money to Terez for a deal. So if you're just starting out, you don't have a lot of money. Wholesaling is a great option because you can get a deal and you can make a really quick profit, and you can start building some profit in there. Now you're not owning the property, so you haven't quite built your asset column. Although you're doing a great job in terms of bringing income in and building that that nest egg, well, not a nest egg, but an investor egg that you can turn into buying properties working capital, working capital, exactly, you have working capital and so you just look at where you are and I think you really the numbers are pretty basic. If you're not going for a huge deal multifamily aware, you have a lot more metrics that you need to be looking at. So if you're just a single family, it really isn't that complicated. You just need to look at how much it's how much the expenses are going to be. What can you rent it for? Are you in an area where people are moving? Or are you in an area where people are moving away? That's a consideration. What kind of markets are in the area or is there just one industry like it was in Detroit, that was a huge problem. When the industry fell apart, and then a lot of people were leaving their homes and there was no one to buy those homes. So those are the kinds of things that you want to ask yourself and don't get caught into wanting to retire from real estate investing next week, because unless you have millions of dollars that you're playing with, you've got to build that and chances are you're not going to build it on the first deal. Although if you keep moving you will ultimately get there you have to stay in it and you have to do the work and be diligent and just believe in yourself a little bit. You can look at other people who have done it and you know you can do it especially when I speak to women, which is who I coach and who I serve. We are looking at what we can, what we're looking at what we can do, how we can get an action, how we can focus and diversify and create portfolios and with, with clarity and confidence so that you can actually get past that part of the of the gate where you're just looking and wanting to dive in and actually diving in and being on the other side of actually, oh, my gosh, I own property. Michael: Yeah, no, I think that makes a ton of sense and kind of continuing in that thought vein, have you ever had a deal a bad deal or a deal go sideways that you could share? Because I think so often, especially on real estate podcast, we're talking about the wins the highs, the best of the best and people are like, I could never do that. I could never be where Tamar is I could never do what she's done. So give us a humbling experience that you had in real estate. Tamar: Yeah, sure. So I can talk about a deal recently, that wasn't really a horrible deal. But definitely the numbers were not what I expected and I did, I never think that you actually I don't like to say you ever lose money in real estate, unless you sell at a loss, right? It's just like the stock market. It's the same principle. If you hang on to the property, and then the prices go up, and then you sell then you made money. But if you sell at a loss, then you that's the only time you lose money. So recently bought a property in Arkansas, and I had boots on the ground. That was the other thing I was going to talk about that if you want, let's say you don't live in a great area, like you live in Los Angeles, you might need somewhere where you have some people in place that can help you find the property and facilitate the, the rehab and manage the property for you. So those are things you think about. So in Arkansas, I had boots on the ground in this area and I purchased a little lake house that I wanted to Airbnb, and the margins were terrific and my boots on the ground were very seasoned and I had done other deals with her before and I kept asking, hey, is the Airbnb regulation an issue and she said she really didn't think it was and that other people were air being in the area and that we just had to go through a process with the with the city and with the with the gated community that I bought in, and that it would be fine and so I went through with the deal and we started buying furniture and I did it very hesitantly because it's, it's expensive to furnish an Airbnb and I kept thinking, well, I want that to go through the regulations to make sure we're not stuck and at the end of the day, we did get caught in some red tape, we were denied by the city, there was a big political issue. We're actually in this area, we're actually going to court now not just me, the whole community of Airbnb, Airbnb homeowners that are upset about the regulations and feel like it's not good for the community and that it's not, it isn't diplomatic at all and so what I ended up doing was I ended up renting it for six months to a guy that was actually building a lake house, and I am covering my mortgage, and I'm making a few $100. So it is cash flowing a bit. But it definitely wasn't the few 1000 that I thought I was going to make in the area. So that's a story where it wasn't like the worst thing in the world. But it certainly wasn't the best I use my resources, I expected a certain return and I didn't get it. But I just pivoted, and hopefully in six months in a year, if the regulations change, then I believe that my property will not only double in value, but I will also be able to start Airbnb being it. So sometimes it takes a little longer when you're doing an investment. Michael: Yeah, okay. Oh, that's interesting. So maybe you didn't get to make lemonade today, but you made like lemony water, and next year, you'll be able to hopefully make the full fledge lemonade. Tamar: This is part of the reason why I like a diversified portfolio because you can't control all the variables in real estate and that's part of the reason why people don't ever get into it, because they are uncomfortable with the fact that you can't control the variables. They think that when they invest with a financial advisor, and the financial advisor puts them in stock, somehow that financial advisor is protecting them and protecting their assets for the one and a half percent commission that they're making. The truth is they don't control the stock market. So it can go down just as easily. You're just as vulnerable. In fact, I think a lot more in the stock market than you are in real estate. Michael: That is such a good point and I just want to kind of touch on that again, because I think it just I had an aha moment for myself. I think when people get involved with other people that can talk the talk or that have experienced doing whatever it is, they get this illusion of say see, and to your point, exactly, the person who's selling you the product or placing you in a product has zero control over the market or the company into the stock that placing you and so I think that's a really great point to hit home. Tamar: I mean, they certainly have knowledge and they are certainly doing the best they can, although we know historically that it's volatile, and then ultimately, they don't control it. Michael: Okay, Tamar. So getting back to kind of having a bad experience I showed on a prior podcast, I just got my lunch eaten on my very first deal, but I was too green, too naive to know to stop. So I just kept falling forward and I was like, well, this is progress. When people hear those types of stories, like whoa, like, I don't want that to happen to me, I'm gonna do my research, I'm gonna get educated, I'm going to do all the things I need to do in order to do this responsibly. How should someone think about being ready, because you could very easily say, and I'm guilty of it, too. Oh, one more podcast, one more conference, one more book, one more coaching session, whatever it is you're doing to prepare yourself if you're just getting started. So how do you take that leap and know that yeah, I'm doing it responsibly and I have enough information to proceed without getting without, you know, being overloaded with information? Tamar: I think you need to be honest with yourself. And I think you need to look at what's really happening for you. So there is a point where you are educating yourself and you do feel like, okay, I want to have my ducks in a row, I want to be pre-qualified for a loan, I want to have a certain amount saved. So I can buy this property at this amount. Or I want to educate myself in a certain strategy and then there's also a certain point where you are just in analysis, paralysis, and one of the things you can do that really helps is one to set a deadline, just decide to say, okay, I have two months to do this and after two months, I'm going to do this and when you do that, one, you're making a commitment to yourself and also in your mind, you're making a commitment to that action, the other thing you can do is get an accountability partner and say in two months, hold me accountable. I said I was going to do this. Now, you mentioned coaching, I'm a huge fan of coaching, I have coaches, I pay a lot of money, for support for guidance for collaboration and I think that it's very important to look at yourself and see if you're the kind of person where you know what, I need somebody to take my hand and look at this with me and say this is okay. Now granted, you could have a mentor, and sometimes you could go to meetups, and you can meet mentors for free and a lot of people are super generous, and they will be able to support you. So you couldn't even get that support for note paying no money and I would also say there is a huge benefit in being in a group being in a private coaching, really looking at what you're doing, and having someone support you in that deliberate way. Because we do pay attention to what we pay for and it's just the truth. So sometimes when we get it for free, maybe somebody gives you some great advice, but you don't pay for it. But then as soon as you pay for it, you think, okay, I just gave that person money to tell me for the value of their knowledge and they told me to do this, this and this, I'm going to do it because I just pay money for that and I want to get the I want to get the benefit of that. So it does work pretty well and the trick is to really know yourself, and to make sure that you are moving forward and don't be afraid. The other thing that happens is we have this attachment to money, we have this false attachment that if we hold on to our money, that we're safe, and that we are building wealth, and that we're secure and the truth is, is that we don't build wealth by keeping it in a bank account, where in fact right now with inflation, we are most certainly losing money. If you want to use the rule of 72 and seven years your savings is gone at this point with the inflation rate we're at. So the truth is that that money needs to be working. I can't tell you how many clients I've had where they have hundreds of 1000s in the bank, and they're just paralyzed. They just don't know exactly. I'm not sure what to do. I don't want to make the wrong decision. I don't want to lose money and I don't know exactly what direction to go in and they are so happy once the money starts moving. I had a client she ended up buying a house that really suited the next move for her. It's an Airbnb, but also her family can use it. So it kind of tied in really nicely with her desires, which is also important and then right after she did it, she made a big sale and some money came in. I mean, it was crazy. Once you start moving the money, money starts moving with you and it's amazing how that works and that's why I really think that the false attachment to money can really also hold us back from the real estate investing and we need to be careful about that because if you fall into that trap, you will just be hoarding your money and it just won't be working for you and you also won't be reaching your goals because you can't buy anything unless you're willing to give somebody some money to buy the property. Michael: All right, that makes a ton of sense. For those that might not be familiar to mark, you just touched on what is the rule of 72. Tamar: So the rule of 72 is you multiply how much percentage you're making, by the years that it will take to double your money. So in 10 years' time seven, that would be 72. So that would take you at 7% 10 years to make that money at 10% inflation, it would take you seven years to make that much money. Michael: Perfect, perfect. Thank you for the clarification. Let's shift gears here and talk about your book. I know you said who it was for it and why you wrote it. But I'm just curious, how did you get the inspiration with so many real estate books out there? How did you want to set yourself apart? Tamar: Yeah, that's a great question and I think this is really at the crux of everything that we do, because we can look also at all the people that are involved in real estate, wait, where's my space? How do I fit in? Is it is the market? Is it too late for me? Those kinds of questions. So for me, right, what I think is a great place to come from is to think about your why and think about why you're doing things. So for me, the book was about me sharing with the world. So I wasn't thinking about everybody else and how saturated the market was, and that there wasn't a space for my book, I was just thinking, You know what, I have this knowledge, I have an idea I want to share who I am and how I got to where I am, I feel like I have a message that I really want to share. I feel that I have knowledge that I want to share and so I just shared… Michael: …and people were clearly receptive to it. Tamar: Yeah, yeah, absolutely, a lot, a lot of women are and men are reading it too, and getting a lot of benefit out of it. So it was really about what it's really all about and everything that that the listeners are do is about what is it that you want and what do you want to put into the world and how do you want to live and if you want real estate, by golly, just figure out a way to get it, you know, other people are doing it, why not you? They're not you're gonna, we're all just humans, we're all just people. The only difference between me and you is that I've done it a lot. So I have amassed a certain amount of wealth and you might be at the beginning or at a middle stage, it doesn't matter. It just you're on your journey. I'm on my journey. But you can still find properties. Michael: Yeah, yeah, not so good. Someone once told me and I forget if it's a famous person or a quote, but you know, you look at someone that's really accomplished. The only difference between them and you as they've made a ton more mistakes than you. It's like, oh, yeah, like they've gone, they've gone through the stuff, right? It's true. Tamar: That's true and most of the people just so that, you know, that I ever speak to, and that in the circles that I'm around where we're a lot of us have accomplished a lot. We have come from nothing. We have worked really hard, we have made a lot of mistakes, we continue to make mistakes, we continue to put ourselves out there. It's just working that muscle and just be willing to be in the world and create the life that you want. Michael: So good, Tamar, it's no secret that the world of real estate investing is like oversaturated with dudes, it's like it's ridiculous and we've really tried to make an effort here at rootstock to highlight the women voices that are out there that are doing it. So what can you share with women that are out there who are wanting to get invested, but are feeling overwhelmed or nervous? Because it is such a male dominated space? Tamar: Yeah. So it's, I think we're still 30% women are investors and we're, we're making strides and I would say, embrace the men embrace the good men and don't feel like it's us in them, just because they've been in the game a lot longer. Historically, we couldn't even buy property, it sounds insane to even say that, because none of it makes sense. Although it's true and we haven't had as much time in this arena. I would say I think the women that struggle more or any woman that starts thinking, oh, those guys, they did this they did that they're hard to work with. I have tons of partners that are men, I adore them as much as I adore the woman and that I work with that I partner with and I believe that if we all embrace what we want, and as a woman understanding that we have skill sets that men do not have and that there's place for us in the real estate investing arena, then we will continue to flourish and to make strides. Michael: Love it, love it, love it. Tamar, this has been so much fun. Where can people get a copy of the book and how can they get a hold of you if they want to learn more? Tamar: Yeah, awesome. The book is called The Millionaire mentality of professional women's guide to building wealth through real estate and you can get it just by going to tamarbook.com. It's T A M A R book.com and then also, I'd love to share my real estate investing personality quiz, which is also at the beginning of my book to support beginners and learning. How do you decide what area of investing you want to go into and that you can tamarquiz.com. Michael: Amazing. Thank you so much and if people want to reach out or learn more about you, is there a good place for them to do that? Tamar: Yeah, absolutely. You can visit my website at wealthbuildingconcierge.com or you can also send an email to me and my team at hello@wealthbuildingconcierge.com. Michael: Amazing and we will link to those in the show notes. Well, thank you so much for taking the time Tamar. I really appreciate you coming on and I'm sure we'll be chatting soon. Tamar: Awesome, thanks for having me. Michael: You're welcome. Take care. Alright, everyone, that was our episode, a big thank you to Tamar for coming on. Really, really great insights. Love the piece about the financial advisor that she talked about. So if you missed that, definitely go back and give it another listen. As always, we love hearing from you all with episode ideas, comments and feedback. So feel free to leave us a rating or review wherever it is get your podcasts and we look forward to seeing on the next one. Happy investing…

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State of the real estate market 2022 with Gary Beasley and John Burns

Play Episode Listen Later Mar 31, 2022 49:43

John Burns co-authored Big Shifts Ahead: Demographic Clarity for Businesses, a book written to help make demographic trends easier to understand, quantify, and anticipate. Before founding John Burns Real Estate Consulting in 2001, John worked for 10 years at KPMG Peat Marwick—2 as a CPA and 8 in their Real Estate Consulting practice. John Burns founded the company to help business executives make informed housing industry investment decisions. The company's research subscribers receive the most accurate analysis possible to inform their macro investment decisions, the company's consulting clients receive specific property and portfolio investment advice designed to maximize profits. Gary Beasley is CEO and Co-Founder of Roofstock, the leading online marketplace for buying, selling and owning single-family rental investment homes. Recognized as a leader in the future of real estate, Roofstock was featured on Forbes' 2019 Fintech 50 list. Gary has spent most of his career building businesses in the real estate, hospitality and tech sectors. After earning his BA in economics from Northwestern, Gary ventured west to earn his MBA from Stanford, where he caught the entrepreneurial bug and still serves as a regular guest lecturer. Immediately before starting Roofstock, Gary led one of the largest single-family rental platforms in the U.S. through its IPO as co-CEO of Starwood Waypoint Residential Trust, now part of Colony Starwood Homes. In this episode, we discuss the current state of the real estate market and the economy more broadly. Gary and John share their thoughts on what has been happening year over year in the housing market; what 40-year highs of inflation, rising interest rates, and geopolitical unrest mean for real estate investors; and highlight some of the risks that investors are faced with today. Episode Links: https://www.realestateconsulting.com/ https://www.linkedin.com/company/john-burns-real-estate-consulting/ https://www.linkedin.com/in/gary-beasley-956647/ https://www.roofstock.com/ --- Transcript Before we jump into the episode, here's a quick disclaimer about our content. The Remote Real Estate Investor podcast is for informational purposes only, and is not intended as investment advice. The views, opinions and strategies of both the hosts and the guests are their own and should not be considered as guidance from Roofstock. Make sure to always run your own numbers, make your own independent decisions and seek investment advice from licensed professionals. Michael: Hey, everyone, welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum and today with me I have two very heavy hitters in the real estate space. John Burns, CEO of John Burn's real estate consulting, and Gary Beasley, co-founder and CEO of Roofstock. So without further ado, let's jump into hearing their thoughts and opinions around what's been going on in today's real estate market. John Burns and Gary Beasley so happy and excited to have you both back on the podcast. Thank you for taking the time to hang out with me today. John: You bet. Gary: Hey, Michael, great to see you. Michael: So I of course, know a little bit about both of your backgrounds and who you are. But for those of our listeners that might not be familiar with who you both are, if you could give us a quick two minute, two second intro of who you are, where you come from, and what it is you're doing in real estate and John, if you want to go ahead and start, that'd be great. John: Okay, I'm the CEO of John Burn's real estate consulting, I founded it back in 2001, to figure out what's going on the housing market for a lot of people, mostly big companies and that's what we do. Michael: Love it and Gary? Gary: Sure, I am Gary Beasley, I'm the co-founder and CEO of Roofstock and we've been at this for about six and a half years now. Building out really the complete ecosystem for single family rental investors and I've known John now, I think, John, since about when you started the company, it feels like we've known each other for a while we when we I think when we met we we both had dark hair. Remember that? John: It's been a very long time. Michael: That's great. Well, I wanted to chat with you both around a lot of things that I've been getting questions about, and I'm sure that the two of you have as well and that's just kind of what's been going on with the housing, market and economy over the last couple years since the pandemic started. So I would love to just jump into things get into the meat and potatoes and get both of your thoughts on really year over year, what's been going on at the macro level in the housing market. John: Well, I guess I go first, if you let me go back maybe three years, so but pre the pandemic because I think it's relevant. The housing market was extremely hot. We have a different view than a lot of people on on how undersupplied the market was, we don't think it was I just applied at all actually until about 2019, then it started to be under supplied and with interest rates. So damn low everywhere in the world, people had figured out that single family rental housing was a great investment just to get some yield and we were seeing a lot of investors come in to the market, then COVID hit so you know investors are very volatile. They stopped for a few months, and then they came back very strong and probably the biggest difference in the last year is the fear of inflation has piled in on top of the need for yield and it's double the reason to invest in rental homes. So we're seeing money from all over the world focused on housing in America. Gary: I would agree that clearly the residential market has been booming and I would say despite a number of factors that you would have thought might have slowed it down. We went through a global pandemic, and housing chugged right on through and we could talk later perhaps about why some of those things happen. But the reality is really kind of across price points and geographies. You've seen robust demand for housing and if you look at price increases year over year, John, I know you track the SFR space really closely and it kind of mirrors what's been going on even if you look at owner occupied sales, but home prices have been going up call it 15 plus percent, year over year, pretty consistently. That's a big number, when you think about historically, it's been about 4%. If you go back 40 years on a compounded basis. That's how it had been up until fairly recently. So a lot of you know in rents have lagged that a bit but you've seen high single digit to low double digit rent increases as well in a lot of these markets and so in oftentimes, I feel rents are a little bit of a lagging metric because especially a lot of the mom and pop owners don't raise rents every year don't raise them, really even to market so we're seeing a lot of homes come to market today that have rents that are 10 or 20%, below where the markets are today. So, so you've got just a lot of demand for the product and, you know, we're at an interesting time now, and I'm sure we'll talk about, you know, some of the current dynamics in the market, interest rates have moved up quite a bit in the last, you know, month to six weeks, we've got a lot of interesting things going on geopolitically, we're not yet seeing that impact, demand or pricing. One would think that those factors should that have an impact over time. But for now, I think just the supply demand dynamics very, very much in the favor of demand over supply. Michael: Okay. Interesting and I'm curious to get both of your opinions on this, I mean, we are at such a unique time, kind of in history and curious to know your guys's thoughts on do you think that real estate investing fundamentals have it all shifted because of where we find ourselves today? John, I'll let you go first on this one. John: I don't know if the fundamentals have shifted, because I've seen this game before. But what is different is that by investing in rental homes has become a very easy thing to do, thanks to Roofstock and others. I mean, prior to 2012, you couldn't get on your computer and figure out exactly how much a home was worth and how much it could rent it for in about five minutes, you can now there's all sorts of vehicles where you can invest in funds and completely passively invest in housing and I think it's become an asset class that really was very illiquid, and pretty lumpy before that now has become more liquid and I think that is a permanent change in the market, doesn't mean things can't go down. But I think it's actually had a permanent positive increase permanently on home prices. Gary: I would agree with John, I don't think the fundamentals, I don't think the fundamentals of real estate investing have changed. But I would say perhaps some of our maybe preconceptions or assumptions about how it would perform is I kind of mentioned earlier, or maybe a little bit challenged, and that there's just so much demand for the product and in the pandemic. You know, it was almost counterintuitive that home prices would go up and rents would go up. But when you think about the fact that people really demanded shelter, safe shelter, and there was an exodus of from a lot of the coastal cities to secondary and tertiary markets drove a lot of that demand. So but I think still, the fundamentals of real estate are very much about location and supply and demand. Those things, those fundamentals I think are true. I think one of the things we're seeing though is perhaps there are different things get that can drive, demand and pricing for different types of real estate assets. So if you look at for example, housing, and industrial, which have done quite well, throughout the throughout the pandemic and the aftermath, and then you had some real estate asset classes that really suffered, because you look at office and retail and and REIT in hotels, things like that. So it's it. I think real estate broadly can be influenced by different things. The fundamentals of each have to be examined, but certainly for housing. It's been it's been very strong, despite what might you might have considered some some headwinds. Michael: Okay, interesting and you both touched on inflation in the conversation thus far and so I'm curious to know, how much of the demand do you think is being really driven by inflation? And do you think that folks are right or wrong to be considering real estate investing as a hedge or as a defense against inflation? John: People's expenses are going up and your investments should beat inflation and nothing in the treasury market does it in fact, nothing in the high yield bond market pretty much does it now too, I don't know how you earn returns. But this was going on pre COVID and that's why I mean that there was a surge of money coming into the market pre COVID. We at our conference at the end of 2019, we had Bruce flat, the CEO of Brookfield asset management, who at the time manage more than $500 billion was fundraising all over the world and he literally said that this is the most significant thing he seen in the last 15 years, is everything that produces cash is gonna go up in value, and that was pre COVID and so that this this has just got even more accelerated because inflation wasn't even part of the equation. Now if you're now if you need to beat inflation in your return and inflation is right now the latest print is seven 8% where you're going to get seven or 8%? And so housing, if wages go up which they are, you can raise rents, if the cost of the structure going up is going up, which it definitely is, every single component in the house has gone up, their cost of construction has gone up at least 10% in the last year. That's an inflation hedge too, because nobody's gonna replicate what you own for the same amount of money. It's very much an inflation hedge. Gary: Everything points toward continued inflation, in my view in the housing market. Now, that being said, interest rates going up, you would think should moderate that. That's an offsetting influence, but the cost of the inputs, the labor and the materials, clearly upward pressure, everything that's going on in the world, disrupting the global supply chain, and the cost of transport and all that putting upward pressure, Pete wage inflation to keep people in their seats, and to hire people. That's allowing people to have more and more money to spend on housing that's also pulling pricing up. It's hard to see how much that's going to, in an absolute basis reduce the price of housing, I do think that we will see some moderating of the rate of inflation of homes over the upcoming quarters and years, I think that 15% is gonna come down naturally. But I don't see, I don't see it coming down to the point where it actually reverses and you see absolute price declines, like we saw in that really unusual time in the Great Recession, which was, arguably a once in a generation adjustment to housing prices there. I think, a lot of fundamental differences between what we're seeing today and and what we saw back then this is not a credit bubble. John: So I agree with everything you said until this is not a credit bubble. I mean, maybe you meant a credit bubble on housing, because I agree with you. Gary: That's what I mean, I mean that there's a lot of embedded equity, as opposed to people, you know, having 3% or less equity in their homes, they've got 20 plus percent equity. Now, you can talk about the I wasn't speaking to the global kind of free money, credit bubble, but… John: Well, that's a I think there's a credit bubble going on in the world on pretty much everything else. I mean, Dodd Frank, made it impossible to do it on a mortgage going through a bank. But people are lending against crypto, it's the highest borrowing and stock prices ever. We're seeing deals even in single family rental that well, I would say are being done with pretty much no due diligence, because it's a mess piece. So there's a little bit of equity in front of me and what I worry about is a recession caused by a credit bubble outside of the housing market, which impacts housing demand and you know, that's when housing was struggle, but I think everything else in the world would struggle at the same time, maybe even more, so. So I'm not, I'm not saying get into stocks or bonds, because it's just that, that that's what caused the great financial crisis, and it was housing last time. I think it's other stuff this time. We were seeing flip flipper loans are being securitized on Wall Street. I mean, there's, you know, I see that in my business, one of my clients is lending against crypto balances. You know, I think another famous person just came out and said, if you've got if you can put up crypto, I'll give you the value of your crypto to make a down payment for a house, that there's some different stuff going on. That concerns me but not on buying rental homes or Roofstock more concerning on the economy. Michael: Okay and so curious, John, just, you know, personal thoughts. What's a good defense? John: You know, normally it would be cash, but holding on to cash it goes down 7% in a year. So I think Howard Marks who's a famous investors calls this an everything bubble. We're in an everything bubble right now and how do you invest in an everything bubble? I have no idea. That's why I run it… Gary: Maybe maybe negative interest rate German bonds don't seem so crazy. Michael: Yeah. John: Well, no, exactly. So, so if you're, if you know, in the coming world, losing 3% is probably a good deal relative to everybody else if that's if that's how that plays out. Michael: All right, well, keep both you keeping your eyes and ears peeled and let me know if you hear something great for hedge against the everything bubble, I'd appreciate it. John: Well, it's it's still specific. I mean, that that's what the smart people aren't doing. They're just, they aren't going to do just a sector. They're looking at everything carefully and in this industry, if you don't have a lot of competition going around where you're making investments, that's a far safer place to be if there's some great job growth in your conference. In a job growth because those employers are profitable and making money and going to be there all the time, that's a different story than the job growth being in a sector that's currently losing money, for example. Michael: That makes total sense, that makes total sense. I'm curious if we could take a step back and understanding that neither of you work for the Federal Reserve, but I'm curious to know your thoughts and kind of get some insight into? I mean, you talked about the wage growth going up, and then the cost of goods and services going up? How do we not get into this upward death spiral? And I know, Gary, you mentioned, you know, raising interest rates could curtail that, but it seems like there's just so much money out there how to, how do we kind of ease down from this? Gary: Yeah, well, I think there's it I don't know, if there's been a tougher, it's never easy being involved with setting Fed policy, but you have a lot of things to balance here. This is a tightrope act. So you want to slow the economy here, enough to curtail inflation, yet, not necessarily throw it into a big recession, you've got a lot of things going on overseas, that should you could argue are already going to cause things maybe to slow a bit because of what's going on over there. So do they need to pump the brakes as much here. So maybe that means that the Fed doesn't raise as aggressively here and what that may mean is, you know, rates grow a little bit more slowly and maybe the economy tends to overheat despite the global weakness. So it's a really, really challenging balancing act, I think that the Fed is under enormous pressure to curtail inflation and so I think, despite that, we'll probably err on the side of pumping the brakes a little bit heavier, even though that may mean we're risking recession. That would be I'd be curious, John, if you have a view. But if I had to, like on the continuum of what they're more worried about right now, normally, they're, you know, I would say that they've been historically more worried about not wanting to put us in the recession. But we've never, in a long time had these sort of inflationary pressures and in particular, where I think people feel it, it seems to be at the gas pump, right? We're always talking about fuel prices people feel that very deeply and there's a lot of political pressure, even though the feds, in theory, a political, political pressures tend to work their way into those decisions. John: Yeah and my 30 plus years of paying attention to this, I've never seen the Fed more politically tied than they are right now. They frankly, they seem to me to be puppets of elected officials. I mean, the fact that Powell had to announce for months and months and months, they were going to raise rates, but never raised them once until he got reappointed will tell you something. So I mean, I always honestly think it seems to me like elected officials are calling the shots right now and I think the ultimate fear is a recession or we want to get inflation down, because inflation isn't good either and then, you know, the way I think about this, too, is there's, if you really talk about people's true costs, there's a huge variation in inflation. So if you're a homeowner who owns your car, you know, your your housing costs haven't gone up at all, maybe you got a little bit of a property tax reassessment, you haven't had to go back and purchase a car or release a car and if you are close to work or working from home, frankly, your cost of living might be down over the last year or two. If you're somebody who's commuting to work, Rance had to you know, really your lease was up had to get another car. I mean, your cost of living can be up to 15 to 20% and the Fed seems to be focused on those people, rightly or wrongly. But that that's how I'm thinking about this is it's a huge difference in what's actually happening depending on what you are, and then the wage growth. You know, if you're in the hospitality sector, you haven't seen anything. But if you're a construction worker or a truck driver, your wages are up dramatically. So and those are the ones I that we're seeing that are buying homes, renting homes, people that are affluent, able to work from home, hey, I can I can now go out to the suburbs and rent a really nice house and my housing costs are gonna go down, not up because my boss says I only need to come into work twice a week. So it's it's very complicated story on picture painting here, but that's exactly I think how the Fed is looking at it. Gary: Yeah. And then you also have, obviously those who own assets versus not I mean, this is similar to what John was talking about, but not only can you have the cost of living impacted a lot, a lot less if you own your assets. But in fact, John, you may know this figure I read it, I think last week, some fairly sizable percentage of the US population made more off of their homes this year than they did from their jobs. The power, the power in an inflationary environment of owning assets, it's kind of hard to overstate it. That I think one of the reasons, I think we're seeing more and more kind of first timers wanting to own their first investment property, even if they aren't in a position to own the home they're living in right now. Going to some of these lower price markets, and getting on the ownership bandwagon and just writing that asset appreciation. It's, you know, it's a powerful force. Michael: Yeah, absolutely. John: I think you were going to say, it's a powerful drug. Gary: Well, some people do become addicted to it… John: We're starting to see that. So people are taking the $200,000 in price appreciation of their house with a refi out of their investment, and then using it to buy three or four more homes, right, that that's what's going on right now. So it is it is addictive. Michael: Yeah. That makes total sense. Gary: Yeah. Well, it's been it's been a, a tried and true, a tried and true way for real estate investors to make money, right is to buy that first property, refinance it, take that money, buy more properties and build. But I think, John, to your point, what's happening is, a lot of people are doing that with their primary home equity to get started, as opposed to being more of the intentional investor who just started to do that, I think more and more people are doing it with, you know, equity in their homes, which I think in many ways makes a lot of sense from a diversification standpoint, rather than having so much of your wealth, personally tied up in a single property address, where you happen to live, where you're really subject to the vagaries of your local real estate market, local job market, all that kind of stuff, because that's where you tend to work to diversify into other markets and other assets, I think does make a lot of sense. Michael: John, would you agree? John: Yeah, no, diversification makes a lot of sense. I just, I also think it makes a lot of sense to watch how much leverage you've got and to make sure you've got the cash flow, you know, just in case something bad goes wrong. And I think people that are investing like that, and doing exactly what you're saying, are going to be great. But last time, what we saw was, people just were ignoring that and then you lose your job, and then you lose your tenant, and you're your host. So you got you got to be careful here and I think the more I'm a generalized a little bit here, but the more mature people that have seen this before doing that, and I'm sensing the younger people only think home prices only go up and I are more willing to take more risk than I would recommend. Michael: John, kind of to that point. I'm curious to get both your guys' thoughts if someone is taking out equity their home, because interest rates are so low, and they've seen the value go through the roof and they're going to go buy investment properties. What's the harm? What's the risk there? I mean, and how does someone know if they are over leveraged? If their cash flow is covering their mortgage payments? I mean, if the value dips, nothing really changes for them from a payment standpoint. So how should people think be thinking about being over leveraged or how much risk is too much? John: I mean, that's a very personal decision for folks. You know, confidence in your employment situation is probably the most important thing and depends on what you do. Gary: Yeah, I think, Michael, I mean, to your point, as long as they think it is an important point, in a rental home portfolio. Yeah, even if prices drop of that home and you've got a fixed mortgage, your payments don't change, right and unless rents come down, which they traditionally have not, they tend to be more sticky in single family rentals than say in apartments. We followed a lot of that data over time. So you should be okay. Even if on paper, the value of your home, your rental home has gone down. But I think in the primary residence, which is where John I think was going is if you let's say you have you know, 60% equity in your home and you lever it up to 90 through various means, then all of a sudden, you may be at a point where if you lose your job, and you don't have the reserves, you may be in a little bit of a tougher spot because you don't have that home equity to tap, which historically has just been a really nice thing to have as as a safety net and so when that if that were to happen you might have to sell some of your other properties or you have your equity elsewhere and it's not like you can't necessarily get at it. But I do think in times where you do have some uncertainty, some global uncertainty and some things like that, having some reserves, make sense, not being over levered, make sense, play the long game, I think that's one of the things that we talk to people a lot about is, this is not a, you know, get rich, quick fix and flip, you know, strategy when you're buying investment properties? Michael: Are you serious? Gary: So over the long run, Michael, you're going to do just fine. But you have to be patient. So no, but there's plenty of there's plenty of ways you could make bats to win quickly win or lose quickly. But that's generally not what people are doing with us and I think there's times when people are more risk on is a lot of confidence to maybe lever up and things like that, I think this is a time to be more a little bit more thoughtful about all about leverage ratios and so yes, you give up some levered return, potentially. But if you're in a, I would argue if you're in a place where home prices are going up at such an extraordinary rate, you don't need as much leverage to get a phenomenal return. Even if you're only 50% levered, and your home's going up seven or 8% a year, that asset level, you know, obviously, you're doing much better than that, and the return on equity level, so I would say just don't get greedy. It's a long game and you know, make sure you're, you're around to, you know, fight another day, in case there's any sort of corrections. Michael: To play the end of the game. John: I mean, that that's the perfect, that's how I see it, too, is cut the long game. And that's how everybody who's been doing this for decades will all tell you that that's exactly the way to play it. I am I am seeing and hearing and running into 20 somethings who aren't listening to Gary's advice and I have no idea if that's 1% of the market or 40. But they're out there and fortunately, they're not getting loans from banks that 90% LTV, at least that I can find, so that's, that's good. Gary: I mean, Michael, you talk to a lot of people all the time, what is what is your assessment are people do you think people are thoughtful about this? Do you think that is? Do you agree with John, that people who might not have seen a down cycle might be overly optimistic or do you think that they're better informed? Michael: Yeah, you know, I think it's really a mix of the two, I think that there are two big camps. One camp says this is going to go on forever and that tends to be the folks that haven't seen a recession before and then there's the folks that say, you know, we're it's got to come down at some point and so let's just kind of see what happens and those tend to be the more seasoned folks. So I'm curious, I'm curious to get your guys's thoughts on for those two camps and someone who's just trying to get started trying to get their foot in the door? How should they be thinking about that, is this something that they can kind of catch on the upswing or is do they really need to be a bit more timid and reserved and say things are maybe a little bit too hot right, now let me let me just take a seat on the sidelines and see how this all plays out? John: So we've been calling this the high risk high reward the part of the cycle now for 13 months. So I would have told you 13 months ago to be cautious and the person who would have taken a lot of risk what I made far more money than the person who listened to me so but that's how these things play out at the end at the end of the cycle. When you take a lot of risk you should make a lot of reward right? But you know, you also need to know when to take some chips off the table you know, unless you believe we're never going to have a recession again which I don't believe that and then also what Gary said has been very true for single family rental rents. The rents have been very stable over time compared to apartments because there's basically been very little construction of rental homes forever and there's always been a ton of construction in apartments and that's when you get hurt killed is when you know three huge apartment complexes open up down the store down the street totally empty and have to lease up 500 units you're done that even though billed for rent is growing pretty significantly in Phoenix right now it's still a lot smaller level of supply than apartments. So this is a more stable investment than comparative some other rental classes for sure. Gary: Yeah, it's it's really we like to say it's a lot easier to go up then sideways because if you could you go vertical with apartments and it takes a lot more land and it's typically much more difficult to add the single family rental supply and then over time, you also have more than one on exit on the on the rental homes because you could you could exit to a yield investor or ultimately, an owner occupant. So that's I think one of the things that I've always liked about single family rentals is you've got built in optionality. It's very rare in a real estate investment, to have two very distinct buyer sets on the back end, right. You have an office building, you're going to sell it to an office investor. Same with a hotel, they would, but so this is, you know, I think a unique aspect of single family rentals, which gives, you know, it kind of gives investors a bit of a of a hedge. Michael: Yeah, that makes total sense. Curious, what do you tell investors who come to you and say, John, Gary, you know, I can't seem to break in, all my offers are getting outbid by all cash offers that are 10 to 15% above asking, I can't go that hi, how can I get my foot in the door? What should I be doing? What tactics should I be using? John: I mean, I might be the wrong person to ask because my clients tend to be very large companies, and this is for their capital partners, this is less than 10%, or maybe of what they're investing in the spectrum of certainly less than 20%. So they may be all in in this industry. But it's it's not, what you're alluding to, is maybe somebody with 100% of their net worth or 80% of their net worth getting in. That's, I don't advise on that, I mean, people are building rental homes, with the appropriate amount of leverage in good locations. That's where we're coaching people to go, there's also people building rental homes, with a lot of leverage in tertiary locations, right, where there's a lot of other construction going on and that that would be to me a higher risk scenario. I think I think there's room for 100 unit rental community, brand new built in every city in America of size, because you can pull it there's 1000s of people that rent ratty old homes with lousy landlords, and there's a percentage of them that would really love to rent something new. Well, and what's your biggest fear is the tenant that said, they're going to sell the house you live in it, you're gonna have to move out? Well, you know, if you're in a rental community that's owned by a public REIT, they're not selling the house, you know that that fear is gone. They may charge you a little more, because it comes with better service and other things. But I think that's a tremendous long term opportunities to build rental homes. Michael: Interesting perspective, Gary? Gary: Yeah, well, I would say, people should do their research, and be patient, be opportunistic, but but not be afraid to act with conviction when they find things that make sense for them and so I think, what we find is, on Roofstock, a lot of times people will come and they will look at properties for months and months and months and talk to people and kind of develop their strategy and eventually, something is going to hit your radar, that's going to check most of the boxes and in this market when that happens, as long as you've done enough work to kind of know this, then be ready to act, you know, I wouldn't recommend somebody come and buy the first home they see because then you're not you just don't have enough data. But when you see where these things are trading and all that, and so that's why I say you know, be disciplined, but also act with conviction, when you find something that does work if you do want to get exposure. Otherwise, you could sit back and just sort of watch things. But you can also wait a lot of times with stock market, also people want to buy on a dip and just wait, maybe there is a little bit of a correction and that could be a time for people to want to wade back in. The challenge with waiting for a dip is, as John pointed out, there just hasn't been even throughout COVID there's been no dip, it's just, you know, been up into the right and, and so, you know, I don't recommend people just, you just buy because of the momentum, right? You want to, again, you want to feel good about the markets you're buying in and the home that you're buying. But also, it's really hard to time a market. It's just it's almost impossible. So heard that that's why overtime, we recommend people not, you know, even if you're only in a position to buy a home now once but, you know, have a design to own a portfolio of them over time and buy them at different points in the cycle and over time you get that market exposure. It's just, it's hard to time your ins and outs perfectly. Michael: Yeah, yeah. Okay, cool. Well, I'm curious now to get your guys' thoughts and opinions looking forward, which I know is always a dangerous thing to do, but I'm going to ask you both take out your crystal ball and in talking, John, you mentioned about new newly built homes built to rent communities and so I'm curious to hear your opinions around, if the housing starts that we're seeing, since COVID, are going to have an impact, you know, several years down the road 8-10, you know, 5-10, eight years down the road, kind of like we're seeing now, as a result from the 2008, lack of home starts. John: Yeah, we've done more research on that than anybody else. There's a couple people with some very simple analysis that says we're short, about five to 6 million homes. I think we're short about 1,000,007, which is still a lot of homes and that's not the same shortage in Buffalo as it is in Dallas. So you know, this is we've got the numbers by market. But at a high level, if we're short, 1,000,007 homes, there's 1,000,007 homes that have brand new homes that have paid for our permit that haven't been finished yet. So we've got all of that under construction and it's taking about nine weeks longer to build a house for the best production builders in the country. So this is taking a very long time, so it's going to be at least a year before we satisfy that, because there will be some growth along the way, too. So I'm not what is different about this cycle is the lack of construction. But what I want to point out is there's this notion that the low level of supply just means that this is almost a sure thing and I think the most important thing for housing has always been job growth always, even rates can go up dramatically. But if everybody's got their job, okay, we're, you know, maybe prices will be flat for a while, but we'll be fine. It's when you see massive job losses that we cycle down hard. So that's why I was I was bringing up earlier the whole credit cycle issues. You know, know, if we if we knew exactly how much debt every company had in every industry had and how much they could cover their cash flow, I think I'd have more certainty. Some analysis I've seen is there's quite a few publicly traded companies that aren't currently generating enough cash to pay their debt service. That makes me concern they're not in the housing industry. In fact, the homebuilders have never been better capitalized like, they're amazing. They have the lowest debt levels ever and the bonds that oh, yeah, and the bonds they borrowed, they don't mature for like four or five or six years. So I mean, the homebuilt talk about a safe play, in terms of going through the cycle, I think it's the builders. I'm not recommending stocks, because I don't do that for a living, because I think all of this is priced in. But I'm telling you, publicly traded home builders are very, very strong, right now. Gary: Yeah. You know, it's interesting, because John does such good research. So I have no reason to doubt the million seven. But I have seen, you know, estimates between four and 6 million homes deficit in in. So I don't know what the right number is and I'm sure that the method, there's methodologies that but but it's still, it's a couple of at least a couple million homes. The question is what, you know, what does that mean, going forward? Do we catch up as quickly? Can we catch up in a year or two? That's, I think, optimistic. I think it'll be interesting to see if we do. One of the things that John mentioned was job growth, and that historically has been a real driver. What I think is so interesting now is jobs are so distributed and because companies are adding jobs doesn't mean the jobs are going to be where the companies are located and that kind of makes everyone's head explode. If you're trying to forecast, what's the impact of job growth, it really comes down, arguably, more to population growth. So local jobs are one thing and some things have to be localized, right? If you're going to work at a hotel, the hotel is in a particular place, if you're going to be a software engineer, working for Apple, you know, maybe you could be anywhere or any of these other places and so it's a it's a different calculus than I think it was 10 years ago of treatment, trying to forecast job growth from companies and then okay, well, people are going to need to live within a 30 minute commute or 45 minute commute it that's all upside down. So I think it does bode well for some of these secondary and tertiary places that have seen disproportionate growth. But then you also have these places like in Austin that continue to explode and arguably housings no longer very affordable but they keep building more houses and people keep buying them and keep renting them and there's plenty of land in a place like Austin and so I think almost looking at where taxes are low, and people can still get relatively affordable housing almost seems to be more powerful than local job growth. But I'd be curious about, you know, John's view of that. John: No, he's right. There's a there's a large sector of the economy where you can live wherever you want and I mean, we, we've been doing this since before COVID, as I was never, never believed that all the best people to hire on the world, we're always within commuting distance in my office. So we've been hiring in good locations, and but you got to get the right person who can do that and companies have figured that out now. So your it is about a great location, it is about where I can get a lot of house for my money if I'm a tenant, or if I'm a homebuyer or I can pay lower income taxes, or I can have better weather. So it's really the same place as people were moving pre COVID. It's just more people have been given the permission to move. So you're right, the job growth. It's pretty correlated to the metro area. But I would say the more outlying areas should see more price appreciation, and they are seeing more price appreciation right now, because more people are being allowed to go there. Michael: Okay. Gary: Yeah and it's almost interesting. It's a little bit like the job, the jobs are almost coming with the people. So you think of a place like Boise, Idaho, where people move there not for jobs, necessarily, but because they could bring their jobs with them and they all had all this embedded equity in their homes for more expensive markets. So now you have all these people moving into a market like Boise, and you get incredible growth in the prices of homes in Boise. But now people are working from Boise. So are those jobs created in Boise are there jobs that now exist in Boise because it was inexpensive, and it's a nice place to live? Michael: Yeah, I was gonna ask John, does that make it kind of squirrely to nail down that job growth metric because of this new phenomenon? John: Yes and no, so there's two jobs surveys, there's one where they call the employer and said, how many people did you hire this month? That's based on where the employer is located. But the one where they call people and say, are you looking for work or not, that comes up with the unemployment number, that's where you live. So actually, we always triangulate the two. So I'll use my example. So we perfect example, I'm in Orange County, California, we hired somebody in Boise, but she could live anywhere. She's showing up on my here in Orange County on one survey, and she's showing up in Boise and the other, so you just you need to look at both the sample size on where the company's located is higher and better and the unemployment number at the Metro levels more volatile. So you got to look at a trend over time and not just overreact to a month or two. Michael: That's super interesting. Okay, and great to know, too. So, the last question I have for you both, and I think I already know the answer. But for everyone listening, I'm gonna ask on their behalf and your guys' opinions, have there been asset classes that have become more valuable and less valuable as a result of the pandemic and if so, what, in your opinion, are they? John: You can handle crypto, Gary. I am not going to touch that one. Gary: Why don't you start then? John: As I as I said earlier, I think new technology which was not around prior to 2012, has allowed the single family rental business to just blossom permanently And it's, it's now gonna be a permanent part of people's portfolio passively investing in real estate And that has already pushed up prices more than it would have been going forward. Whatever price appreciation would have been otherwise, it'll probably push it up a little bit more. The only thing you have to concern to certain yourself where there is, you know, the government doesn't like that And they tend to be pro homeownership. So you gotta watch regulation. I am seeing a lot of our clients tend to avoid California because they're afraid of rent control. So and there was just a Bloomberg article that 12 Different states have had rent control proposed because of all of this. So you just got to keep your antenna up on on that side. But the rent control is being proposed seems to be more reasonable. It's at the rate of inflation or maybe 1% higher than that, that you can raise rents. It's not, you know, zero or something ridiculous. Michael: Okay and what in your opinion has been devalued or become less valuable, if anything? John: Um, I can't think of anything that's become a …Cash! Gary: It's it makes sense, right? I mean, you're you're losing. I mean, John, John mentioned, if you're literally if you have money sitting in your checking account, right now it's point 001% and we've got 678 percent inflation, that's how much you're losing by sitting in cash and so that does create a risk incentive to put it somewhere. And you know, I would say, Michael, I mentioned this earlier, but I think housing and industrial, which is driven a lot by distribution for E commerce, a lot of those have been really darlings of, of, for investors, they've become very much in favor and I do think you're still seeing some challenges with in some questions about office space demand and you know, not that there aren't always office investors, and there are always going to be people in offices, but there's probably structurally some percentage of less space that companies are going to utilize and so that puts maybe some uncertainty into the minds of investors, if there's another I think, I think a lens people investors are looking at today is okay, there's going to be another pandemic someday, what are the likely implications of this and, you know, office, retail, traditional retail was hurt by the pandemic, but it was also being crushed just by Amazon, right, and so you, so that's, I think, got its own challenges. And then hospitalities is very cyclical anyway, if people stopped traveling, you know, they didn't travel for a while. So those those I think are, you know, maybe a little slightly more challenged than housing, which is, which has proven to be much more resilient than, than I think most people thought and, as a consequence, you have a lot of a lot of investors, not just, you know, traditional or not just individual investors or institutions from here. But yet people from all over the world saying, well, US housing looks pretty interesting, relative to other places that they could invest. Michael: Yeah. John: There's something we take for granted here called Title laws that don't exist in other countries. I mean, people in other countries don't want to buy real estate there, because the government could take it away from them. You know, and I hear that from foreign investors. That's one of the things that they love about investing in America. Michael: Pretty scary notion if you had to be overseas John: …Or get I should have mentioned everything that Gary said to I mean, there's a lot of huge funds, pension funds, who like to put a percentage of their assets a 10% in real estate all the time, and it would traditionally go into retail and office and hotel. Do you think they're ever going to go back to the same percentage of retail hotel and office? Probably not, it's going to be far more in this business. Because retail is now industrial. I mean, it's a warehouse and in line, you know, the best retail centers are all going to be fine in the best locations, but they're in line space is dead. So, so you're right, that's gonna push more money into our business. Michael: Okay, well, guys, this was super informative. I know I had a lot of fun. Hopefully our listeners did, too. If people want to learn a little bit more about each of you, where's the best place for them to do that? John: Oh, we've got a website https://www.realestateconsulting.com/ I post pretty regularly on LinkedIn. So you can look up John Burns on LinkedIn and get some free stuff every day. Gary: I love the free hoodie that you got right there, Michael. John, I know you've got a Roofstock hoodie as well. I don't know if you ever wear it. John: I do, I should have bought it today, I'm sorry about that I should. Gary: So yeah, I think I would just encourage people, if they want to learn more about what we're doing at Roofstock just come to https://www.roofstock.com/ you could also follow me or hit me up on LinkedIn, I post pretty regularly there as well. But yeah, and keep checking out the podcast I know Michael's been doing a great job along with Pierre and the rest of the team here trying to get they couldn't get any interesting guests this this time so they got John and me but I know they've been otherwise doing getting some pretty interesting folks and doing a great job. John: Well I saw that you're then the one of the top 1% of podcasters in the world. Hopefully we didn't push it down to 2%. Michael: A filler episode though this this was great you guys. Thank you so much for taking the time and I very much looking forward to chatting again as we continue along this crazy trajectory that we're on. Alright, everyone that was our episode, a big thank you to John and Gary for taking the time out of their extremely busy schedules to hang out with me and chat about what's been going on in the real estate market and where we might be headed going forward. As always, if you liked the episode, feel free to leave us a rating or review wherever it is you get your podcast, and we look forward to seeing on the next one. Happy investing…

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Is it smart to invest in single-family rentals before multi-family?

Play Episode Listen Later Mar 12, 2022 17:53

A lot of real estate investors start out with single-family homes and soon realize that multifamily helps them scale much faster. But multifamily properties can come with more complications and many investors appreciate having learned the ropes in the single-family space before taking on this asset class. So is it smart to start small and work your way up or just dive into the deep end? In this episode, Emil and Michael share their experience on this topic and point out the pros and cons of either strategy. --- Transcript Before we jump into the episode, here's a quick disclaimer about our content. The Remote Real Estate Investor podcast is for informational purposes only, and is not intended as investment advice. The views, opinions and strategies of both the hosts and the guests are their own and should not be considered as guidance from Roofstock. Make sure to always run your own numbers, make your own independent decisions and seek investment advice from licensed professionals. Michael: What's going on everyone? Welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum and today I'm joined by my co-host… Emil: Emil Shour Michael: …and today Emil and I are going to be chatting about does it make sense to start with single family or with multifamily? So let's get into it. Alright, Emil, how's it going, man? It's been a minute. Emil: Good dude. How you doing? Michael: Hanging in there hanging in, I got a couple of refinances that just close today that I'm working on for a long time, so really excited about that. So I'm going to be redeploying some capital here to some short term rentals. How's, how's the triplex sailing all smooth? Emil: Yeah, I haven't, I haven't received an email in weeks. So that's my favorite kind of news is no news for my property manager. Michael: It's a good sign. Yeah, oftentimes I would say. Emil: Yeah, yeah… We've got tenants in place, you know, they're all fresh, no bad news. So fingers crossed, it keeps staying that way. Michael: Sweet! Well, today, Emil and me want to talk about if it makes sense to start with single family or multifamily as you're just getting started. And you are someone that started with single families, right? Emil: I did! My first investment property or actually any property I purchased. It was an investment property. It was a single family in Jacksonville, Florida in 2017. Michael: Okay, and now you're a seasoned investor, you've got six units, I think, you've done some multifamily. Emil: Yes sir. Michael: Should you have done differently? Emil: I am happy I started with single family. I think starting with one tenant, one home one unit, is the ideal way to start. I don't think, I don't think this is like one of those. There's a better or worse way. I think it's what is what is your appetite for pain? Do you do want to like learn really fast and deal with a lot of craziness at first or do you want something slow and steady and just like an easy on ramp? So for me having a full time job, at the time, starting with a single family was perfect. It was like, I got to learn how to manage a property manager different things that can go wrong. It was just an easier transition for me and I'm happy I started that way. Michael: Yeah, it's funny you say appetite for pain. I think we just want to be careful to not give people the impression that single families can't be a highway on ramp to pain because you know, my first, my first investor was also a single family and it was like the most painful one ever. So I think it's, it's you can have you can have it either way. You can have horrible experiences with single family, you can have amazing experiences of multifamily. So it really just depends, I think how the asset is structured and where you're buying it. Emil: Yeah, but you could… let's say you bought a quad Plex, right? You had the same thing, but times fours. It's just like your percentage. No, actually, I don't know, you could look at it either way, you could say, well, I have 4 units, my likelihood of 100% pain is much, is much less likely than so I think personally it's just easier to go with one, learn the ins and outs. Again, you're learning, especially if you're remote investing, you're learning how to do that, you're learning how to deal with a property manager. I think overall, it's just easier with one. Michael: Okay, and let's dive a little bit deeper. I mean, talk to talk to us a little bit about like, when you say learning the ins and outs, what does that mean? What did you learn from investing in that single family that then better prepared you to invest in that triplex and what was totally brand new? Like what caught you off guard with the triplex? Emil: That's a good question. I think it's just, you know, if you never if you've never owned your own home, there's all these moving parts of a home that you're not really like, I don't know how an H back works. How does plumbing work? What's uh, what's the main line? What's all these things? I've even forgotten already, as we're on this podcast, but like all, all these bars, all these parts of a home that you just you don't really know. I think that's one just getting more familiarized with all the moving parts. Michael: Does it matter that you didn't know how an H back works? I mean, you don't know how a car engine work. I mean, I assume I don't want to I don't want to put words in your mouth. But do you know how a car engine works? Emil: Here's the difference. A lot of things go wrong with your property. I don't say a lot, but things go wrong, right? And it's on you to know, how much does it cost to get that fixed, right? Like if someone said, Hey, your condenser broke? We're gonna replace it for $10,000, how would you know if that's accurate or not? Michael: I gotcha, I see what you're saying. Okay! Emil: So that's that's one thing. Michael: But it's the same thing with car if you take your car to the mechanic and they say, oh, you're continuing to trance function or is broken. We're gonna turn into $1,000 to fix it. So our concept, right, I guess you have to you have to chat with other people… Emil: Well my first car was a $6,000 used car. So I would just say, okay, you guys keep it, I'll go get a new one, you know what I mean…? I mean, it's like, it's, it's also, in most cases, less less dollars in, right. So a multifamily is going to be more dollars in your learning on more dollars versus single families less dollars in potentially, so less dollars you potentially have on the line to learn. Michael: All right, all right. I will, I'm gonna I'm gonna take a… alternative position on that one and push back, I think that you can actually find multifamily in particular markets that are as inexpensive or less than some single family. I mean, they're single family all over the place in the 2,3,4- $100,000 verse multifamily, you can find properties that are less than so I think that's a very common misconception that people fall into is oh, multifamily is automatically more expensive and I don't know that that's necessarily the case for every market. Emil: Yeah. But then you're putting you're potentially putting the cart before the horse, right? You're saying I'm going to go find a market where it meets this versus you should find a market that you like, and then look within that market? Michael: Hmmm… Yep. So you're letting the deal dictate the market or letting the market dictate the deal? Emil: Right! I think it's like some people will just I started that way, right. I said, okay, this is how much I want to spend, which markets kind of fall into that, which is one way, but I don't know if that's the right way. I don't know if it's the wrong way. But I would, I would rather if I could start it all from scratch, say like, what is the market I want to really invest in? And then secondarily, who is the property manager, I want to invest with? Michael: Oh, that's very well said. And so you're someone that wants to kind of cluster their investments in the same market? It sounds like…? Emil: I would yeah, I think I've said that, like on previous episodes being scattered across couple different markets, I think finding one market you like, you're finding good deals, you have a good property manager, again, to me, that's the key is finding a property manager. It's tough, it's like how do you find that good property manager without trying several markets, right? Michael: If you get some perspective and you go other places, you realize, oh, man, my manager was amazing, or well, my property manager kind of sucked. Emil: Right, right. Well, that's the value of I think networking and talking to other people who are doing real estate investing rather than just going solo. Michael: Totally, totally. And I cut you off before to go down this rabbit hole but you were saying, you were talking about what the ins and outs were that you actually learned that prepped you to be ministers as a multifamily investor. Emil: I don't think I'm a successful multifamily investor. I have one drive legs and that's been a big learning experience. I don't know, it was just it was a different learning experience in that I had multiple tenants leave at the same time. You know, single family, you're not paying a lot of the utility bills, right. So you're learning on the multifamily, like, what are my actual expenses? What do I cover? And how much are they each month? So it's like, yeah, you can estimate and talk to people, but like, it's just things you're going to learn by doing and buying? I don't know… Michael: Yeah, I think it makes a lot of sense, I think it makes a lot of sense… Emil: Those are of the things that come to mind. Michael: Yeah. Emil: And then, you know, how long does your average single family tenant stay versus multifamily? Like, yes, their stats online, but it's to me another one of those things you learn by doing? Michael: Yes, very much so, very much so. See, it's so funny, so many of the points you brought up for single family, I agree with and I think are valid, but I have like the opposite experience and I experienced those things with multifamily. So I actually have another episode too, like my first two investments were single family. I had the tenants leave every single year, they did a ton of damage on the way out and had to go to small claims court. So I was like, oh my God, this sucks. So that's ultimately kind of what led me to multifamily, I was like, oh, I gotta do something different. This is not this is not working out. So had much better luck with multifamily and that's where I've been focusing on since. Emil: For the record, where are your single family, those two single families you bought? Michael: They were both in California, in Southern California. Emil: Southern California is a tough market for landlords, man… Michael: It very much is… Emil: That I think probably played some into it, potentially for you. Michael: I think so, I think so. But also I mean, like given that I've also purchased I purchased two flip properties. One was in Birmingham, Alabama and the other in Kansas City, KC Mo, and that's been those have been paying to the butts too and so I think it's it's not a one size fits all like you were saying and it's it's very much personal preference. Emil: Sure Michael: But some takeaways that I had from investing in small multifamily, so two, three and four units is, as he touched on earlier, was the likelihood that you have both tenants or all of the tenants having issues or vacancy or causing damage, the Cisco likelihood just goes down. And so that's why a lot of people buy multiple properties because if you have one property, the likelihood of having one vacancy is fairly high if you have two that goes down, so on and so forth as you expand your portfolio. And so you can do that and acquire more units and increase the statistical likelihood of success. Success in this case, meaning not no vacancy and less repairs, with fewer transactions and so it just becomes, easier from a management standpoint and easier from a mental capacity standpoint, when you're thinking about, okay, I've got one address to worry about, these are all the things going on there as opposed to these five different addresses to keep track of and so I think for from a small multifamily perspective, like, again, those two to four units, it's fairly similar from a how to own and operate perspective and I think you nailed that also talking about like the expenses and so from that perspective, it can be a little bit different, and your expense load and what your operating costs look like, and who pays what and how often you might have a turn. And but the cool thing is, the financing is the same. So if you go buy a one single family or a two to four unit, and you're getting conventional financing, that's the same, which is really, really cool. It's not until you make that gap into that five plus unit space that it changes into commercial financing. Emil: Right. And that's probably something important to consider here as well, if you're like thinking about multifamily or single family is, well, if you have less time, let's say you wanna invest real estate, but you have less time, right? Multifamily, we know is valued on how well can you make it perform, it's more like a business, tather than, you know, one to four unit, you're kind of writing the ups and downs of the market to value it right. It's all sales comps. So maybe if you have more time, and you can you feel like you can manipulate the NOI on that property, get it valued higher to do those things. Maybe multifamily makes more sense for you and then but maybe if you're you know, super busy and you want something a little bit more passive, I've just found that my single family has been more passive, my attendance stay longer. I haven't done the triplex for a ton of time. It's been a year and a half. But my tenants stay longer, I hear less things overall, is what I've is my personal experience with, very limited units, so… Michael: Yeah, I think you've made a great point talking about time, time perspective, I would just add to that, that if you're just starting out and taking on a multifamily investment, finding something that's that has a value add component might be tough. And it really comes down to like, I know, I was way in over my head with my first multifamily deal I had. Because I just feel like you don't know what you don't know and so you're jumping in, like you mentioned, to this multiple unit situation where all of these things are new, versus trying to figure it out with one tenant and one property in one door, where everything is still new. And so I think that there it's it's often an easier pill to swallow. But if someone is super gung ho and wants to take risks and has the financial wherewithal to back it up, and is like yeah, I know I'm gonna I'm no, I'm gonna learn lessons, but I want to learn lessons hard and fast. Multifamily can be a really great way to do that. Most value add now layering that on top of that is another way to learn even harder and faster and more expensively. So if someone's just starting out, I think and they're gung ho about multifamily, I think a turnkey multifamily can be a really a really great way to go. Emil: Yeah. That's something interesting you kind of bring up their trauma to me not trauma, but like recollection of my this, this triplex my first multifamily is when you're wrong on your calculated repair costs and all that it compounds, right. So if you have three units, you got a turn, and you think it was 5k each and you were wrong, it multiplies faster than oh, the the kitchen on my multimeter and my single family, I thought was gonna be 5000 ended up being 6000, right. Like, you just multiply it if you're wrong multiple times. Michael: Yeah. No, it's such a good point, it's such a good point. I wholeheartedly agree. Emil: Yeah. But it's good. That's a good learning experience that, you know, people should go through. Michael: Yeah, well, I would argue I would have preferred to have someone else go through it and tell me about it and then I could learn from their mistakes, which is why we started the Roofstock academy. By the way, we talked about, hey, this is purpose built for investors, by investors for all the crap that we had to go through that we wish other people had told us ahead of time. Emil: True, true and it's also valuable in that, like, your cost will change from market to market, right? So having other people in the same market you invest in, it's just so valuable. Michael: Totally, totally. And oh, I forget who said it. I don't know if it's a famous quote, or it was someone I just heard talking, but they're saying like, not every dollar of rent is created equal, in that in every market you go to, just because it looks attractive on paper doesn't necessarily mean that it's going to be, you know, a rosy walk in the park and so be very particular and do your due diligence around okay, what is the market do? And what is the market doing? And why is this thing, both single family or multifamily, the price that it is both from a rental perspective, as well as a cost perspective. So if you're like, holy crap, I can go buy these $200,000 property rents for five grand a month. Why is that? You know, what, did you find a unicorn? Maybe? And let's, you know, go figure that out, just because it's so good. It shouldn't scare you but you should definitely put up a red flag and say, okay, well, let's investigate this further and find out why this is the way it is. Emil: Right. Michael: Awesome. Any other points Emil, before we get out of here? Emil: No, I think I think we actually cover this one pretty well, in terms of our individual experiences, pros and cons of each thing and it was well covered. Michael: Love a good humblebrag… Awesome, let's get out of here. Emil: More so by you, you're just grilling me and I'm like, uh,… I still remember Michael, it was four years ago. Michael: You tried to block it out of your mind? Forget about it. Emil: Yeah, I'm like, I don't know. I just it's kind of one of those things where you're like, you just put one foot in front of the other and you know, you're drinking from the firehose, so… Michael: Totally. Yeah. Well, but real quick, so last question, before we get out of here. How has that investment panned out for you, that first single family? Emil: My first one? Michael: Yeah. Emil: So yeah, it's been a cash cow and if you hear crying in the background, that's my newborn baby in, shout out in. Michael: My baby boy in… baby boy… Emil: Baby boy… So when I bought it, I think the rent was somewhere around 900 and we've just had steady rent increases and the same tenant for four plus years now. So I think now it's at like 10350 or somewhere like that. Yeah, and just having the same tenant is so valuable. I love it. It's so nice. That's my favorite thing was single families. They seem to stay longer. Michael: Love it. So what was probably a good deal at the time has now turned into if you saw it today, a great deal, it sounds like… Emil: Yeah, I think it was a, if I'm being objective. It was a decent deal at the time and now it's become a pretty good deal for me. Michael: Love, time, compounded with like good decisions. That should be like an equation time. Time plus good decisions equals, I don't know, killer deals. Hey, everyone… Emil: Michael Einstein, the Einstein of real estate. Michael: So dumb… awesome. Well, let's get out of here, Emil. That was our episode, everyone. Thank you so much for hanging in there with us through all those rabbit hole side tracked conversations. As always, if you liked the episode, feel free to leave us a rating or review wherever it is you get your podcast, and we look forward to seeing the next one. Happy investing. Emil: See you later.

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These 10 states have the lowest property taxes

Play Episode Listen Later Dec 18, 2021 18:27

We recently did an episode on the 10 cheapest cities to buy property in so we wanted to follow that up with a look at property taxes across the country. We pulled up a list compiled by Business Insider on the states with the lowest property taxes. In this episode, we go through the list and comment on what this means, and point out potential shortcomings of a list like this. This episode will answer questions, but it is really a starting point of where to do your own homework on this topic. And like Michael always says, "make sure to call the local county tax assessor". --- Transcript Before we jump into the episode, here's a quick disclaimer about our content. The Remote Real Etsate Investor podcast is for informational purposes only, and is not intended as investment advice. The views, opinions and strategies of both the hosts and the guests are their own and should not be considered as guidance from Roofstock. Make sure to always run your own numbers, make your own independent decisions and seek investment advice from licensed professionals. Emil: Hey, everyone, welcome back for another episode of The Remote Real Estate Investor. My name is Emil Shore. And today I'm joined by Michael Albaum, Pierre: Pierre Carrillo Emil: And today's episode we're going to be do some similar as we did on a recent episode, which was the if you guys remember the episode 10 most affordable states to buy a home, we're actually going to be covering the top 10 states with the lowest property taxes and this will be 2021 data that we're going to go over to help you you know, as you're looking for markets looking for states invest, hopefully all this data will help you in that journey. So let's hop into this one. Alright guys, so we are sans Tom today. But we got we got Michael and Pierre, which Dynamic Duo here. Very excited for this episode. Last time, we did some fun where I have the list in front of me. And you guys guessed, I think you each took three guesses and see if you made it in the top 10 list. So let's follow that same style. Pierre, you get to start this time. So we'll go we'll go back and forth. So Pierre, you'll go one, Michael, you'll go one and we'll just flip flop back and forth. And I will tell you guys, if that state is in the top 10 list of lowest property taxes, Michael: Love it. Pierre: All right. Michael: Good luck Pierre. You're gonna need it. Pierre: Yeah, I'm just trying to remember all the different agents we've had on over the over the last year so definitely not Texas because they don't have income tax. Emil: That is correct. Pierre: I'll say Alabama because that was one of the reasons we chose Alabama because… Michael: Dirty dog Pierre: Man was it low. Emil: Alabama. Ding ding ding That is correct. Michael: Nice. Emil: Alabama is one of the top 10 Lowest property tax states good job Pierre. Alright, Michael, what you got? Michael: All right. I'm gonna take a flier here and I'm going to go and say Tennessee is going to be in the top 10 Emil: Tennessee… Eeen. Tennessee is not in the top 10 Lowest property tech states. Sorry, Michael. Michael: Ah, swing in a miss. Emil: Pierre looking good, dude. All right. What you got for your second guess. Pierre: Can Kentucky Emil: Kentucky is not on the top 10 list. Sorry. Pierre: Oh man. Michael: All right. Michael: Virginia. Show me Virginia. Emil: Show me Virginia. EEEn. not on the list. Sorry Michael. Pierre: Oh man we're strugglin. Emil: Mike you're struggling. You guys did so much better on the other episode. I feel like it was you guys were doing really well on that one. Come on guys. All right Pierre. Michael: Alabama, Arizona Arkansas, California Colorado. Remember that fifth grade project the state's project and school you have to remember every state every capital. Emil: Yeah. Those are some… Pierre: Oklahoma Emil: Oklahoma final guess. Oklahoma is not on the list. Alright Michael chance to tie it here or just go down in terrible blaze Michael: Of glory. Like a like a phoenix rise from the ashes of embarrassment. Show me Mississippi. Emil: Ding ding ding Mississippi. Michael: Yes. Eat it Pierre. Emil: Redeems himself. Hold on you guys. Pierre: Just not Jackson, Mississippi. Emil: You guys died. Good job. One a piece. You know, you have 33% You both failed. But you both at least got one on the board. Michael: I went to engineering school 33 is passing for sure. Passing like that's like the highest grade oftentimes. Emil: I get it. Yeah, if it's based on a curve, you guys both pass. Michael: Sweet. This is a list compiled by Business Insider. And again, this is for 2021. Michael: So top 10 states with the lowest property tax. We'll start at number 10 move our way to number one, or so like this is 10th least expensive. Number one is going to be the least expensive in the country. Right? How this list works? Emil: Yes. So counting number one will be the lowest on a percentage basis property tax. Starting with number 10 We got New Mexico at 0.55% of assessed home value. Michael: I just gotta say already this list is garbage. Because the way homes are assessed is so different in every state. So I guess that's just something to highlight and point out is like, look to understand and every county does differently, by the way. So like understand how your county that you're interested in purchasing property calculates property taxes. So is it assessed value is it sale price, sometimes those two numbers are the same. So it's really important to go do a little bit more digging after this episode. And these 10 places can be a great place to start. But I just had to get I had to get that off my chest. Assessed value is a bunch of garbage like they two assessors for different states who like the same property, and it says it differently. So whatever that's worth. Emil: I've been the beneficiary of this on on my triplex in Missouri, the assessed value they gave was insanely low. So I've been the beneficiary of that. But yeah. Pierre: You're just bitter that you're a veteran that tied with a newbie here, so. Michael: Looking for any excuse to just to claw back some knowledge, some knowledge share. Michael: What's number nine Emil? Emil: I'm curious, Michael, if you know this so assessed home value, is that literally the structure? Does that include land? Does it not include the value of the land? Do you know how that works? Michael: It's usually broken down between land and building is how I've seen it. Emil: Yep. Michael: And then I think oftentimes, the assessed value is the sum of those two. And so you're not depreciating the land on your taxes. But I do believe that the land is still taxed, because if you just go buy raw land, I think you'll still have property taxes to pay on that. It's going to be significantly less than but that's, that's my understanding. Emil: Okay, so that's interesting. I just really quickly looked up an article on what is the assessed value of a house. So I'm just gonna read this. This is from a website called Value penguin by lending tree. So it says officials review other relevant information such as neighboring property values and the sales history of the property to determine the assessment value. This estimate is generally made without actually inspecting the home which can lead to an inaccurate valuation, which is a testament to what you were saying, Michael. If the assessed value is higher than the fair market value, the property has most likely been over assessed by the town and the owner is probably paying too much in taxes, which is one reason you know, you can actually fight your property taxes. The assessed value of a home usually lags in comparison to the market since the valuations are only adjusted annually. While market values can change multiple times per year, the home that has recently been resold tends to be closer to the assessed value than a home that has not sold in a long time. Depending on the area's legal restrictions. Most assessed values cannot increase more than certain percentage each year. So interesting. Okay. Michael: And I mean, that's another question to ask your cat like local county assessor is how often is the property reassessed because there are some jurisdictions where it's like once every three years or once every regular, some kind of frequency so it's not always an annual thing? Emil: Yep. Yeah, I remember when I was recently buying that treeplex, triplex I just mentioned in Michael: The treeplex! Emil: You know, what, we have a new kid at home, I'm allowed to have brain farts like that. I called the assessor and they gave me like, the Calculate the formula that they use to calculate it. So a lot of times again, if you're looking anywhere, you can call the county assessor, they'll either give you the formula, or they'll give you a breakdown of how they kind of calculate these things. But anyway, back to our list. Number nine, we got Mississippi which is 0.52% of the assessed home value. Good old Mississippi, and. Michael: MI SSI SSI PPI. Emil: You like geography, didn't you? You're getting geography class, Michael: Dude. I love geography. Yeah, I really like geography. My wife and I will sometimes play the geography game where she'll you know, we'll go back and forth naming countries and you gotta name the capitals. The good fun brain brain game. Pierre: Have you guys ever played the National Geographic board game? Emil: No. Tell us. Oh, it's, it is awesome. So I found this at the Goodwill. The Goodwill here has an entire row of board games. So we went there. And they're like, 3.50 each. So in board games are like 50 bucks each sometimes. So anyways, this is like a game from 1986 or something. And it's anyways, you build a globe flat out. So you have a bunch of hexagons and you you build a globe, and then you answer things about markets and people, geographic or planet planet Earth and you have like four categories and you get points based on it's a real fun game. So as a geography lover, you might really enjoy that game. Michael: I'll Check it out. And that's cool that you build the earth flat because that's how it actually is in reality, so I mean. Emil: That's right. Pierre: Yeah. Well, because you make it flat you can make 4 Earth's because it's like when you unpeel an orange peel, it doesn't lay perfectly flat it leaves up open surfaces. Anyways, National Geographic plug right there. Emil: Nice. There's, there's this app I downloaded a couple years ago and it like helps you learn continent geography so it'll pull up Europe and you know, it'll have the outline of each a bunch of countries and then I'll like list 10 And you have to like tap where you think that country is. So it helps you like are there in different continents. So it's cool to alright, that's cool. Number eight. Michael: Back on the rails. Emil: Back on the rails number eight, we got Arkansas at the same as Mississippi 0.52% of assessed home value. So we got to a tie between Arkansas and Mississippi. Moving up the list. This is a very popular hot state for for Mark for rental property and investing right now South Carolina at 0.5% of assessed on value. Michael: Interesting. All right. All right. Pierre: Yeah. Interesting, because we've had both Jackson, Mississippi and Columbia, South Carolina, Columbia, South Carolina, right. Yeah. And those were both very high in taxes. So this is just kind of an average of the states. And no necessarily those metropolitan centers. Emil: Correct. Pierre: Or metropolitan. Michaela: Right cause every county can do it different. Emil: Alright, moving up the list we got I think somebody mentioned Virginia but number six on the list was West Virginia. Michael: Ooo man. Emil: Was that you Michael? Michael: That should totally count Yeah. Pierre: If that counts, Kansas counts for me. I'll just the add the Ar! Emil: On Jeopardy. What is Virginia would not be the same as what is West Virginia. Sorry, Michael. Michael: Alright, seems reasonable. Emil: 0.49% of assessed home value on West Virginia. Michael: West Virginia was actually I think the number one state that was on the top 10 list of most important places to buy. That's interesting. And get a cheap house and pay very little property taxes. Emil: There you go. Alright, moving up. We got the District of Columbia DC at 0.46% of assessed home value. Obviously, homes are very expensive there. So you're still paying a lot in terms of nominal dollars, but percentage wise on the list of top 10. Alright, number four, Delaware, we got 0.43% of assessed value. So business friendly, right. Some people like incorporate a lot in Delaware and then looks like low property tax there as well. Number three, this was Pierre's guess Alabama 0.33% of assessed home values. Tiny. Michael: Nice. Emil: Go Alabama. Number two, this one was surprising to me. Hawaii, Hawaii 0.26% of assessed home value. Michael: What? That I guess I figure you're paying so much for the purchase. You're still giving them like you said a lot of nominal dollars. Emil: Exactly. And then number one, can I get a drumroll please guys? Louisiana 0.18%. Nothing's 0.18% of assessed on value. Crazy. Piere: Beautiful. Michael: Makes total sense. Emil: And that is our top 10 list of states with the lowest property tax. Michael: We should do another episode ranking the best school districts or the best school systems in the country and see if there's any any over overlap or direct correlation or parallels we could draw between high property tax states and very good school systems since that's so much of what those dollars go to fund. That's I think, like looking at the property tax breakdown, that's often the biggest portion of the bill in terms of like dollars and percent goes to the school system. Emil: Right. It'd be interesting, though, because again, even though you could have, like California, I think is probably the bottom third, or it's definitely in the lower group, the bottom 50% In terms of percent, I think, but just because home values are so high here, again, like just so much property tax revenue. So I wonder if it's like, you know, this percentage matter? Does it just matter of like overall dollars being pumped into the system? Michael: That's a good question, too. So for California, it's I think it was Prop Eight, I think I'm talking. Emil: 13 Michael: Prop 13. That's it, where you have 1% of the sale price at a minimum Emil: Forever and then never gets reassessed. Michael: Well, it does it goes up with time. But like your base value, your base assessed value is at 1% of the sale price. And so Emil: I thought either prop 13 in California was like your basically your property tax never changes. I thought that was the whole thing behind prop 13 is like once it sells it's calculated that value forever. I thought that was the thing with Prop 13. Otherwise, you know, you have someone who bought a home in California 30 years ago. And now their property taxes like astronomical compared to when they bought it because their values have gone up so much. Michael: Well, I think it goes up nominally every year like, look at your last two years of property tax payments on your house. Like it will have likely gone up a nominal amount. Emil: Okay, yeah, you're okay. So proposition 13, declared property taxes were to be assessed by their 1976 value and restricted annual increases of the tax to an inflation factor, not 62% per year. Okay, you're right. Pierre: And don't some areas charge more on property taxes based on whether or not you're going to be investing or whether or not you live in the property? Emil: Yes, I have a home in Indianapolis and you pay a higher rate if you're an investor, rather than if you're a owner occupant buying that home? Michael: Yeah, I think it's like point 2% of the assessed value versus 1% For investor versus owner occupied. So like doubles? Emil: Yeah, I think that's right. There's a there's a exemption to in California homeowners exempt or a home homestead exemption. It's pretty, it's pretty minimal. It's pretty nominal. But in other markets, it can be pretty impactful. Emil: Yeah. Pierre: Do you know if any of the states that we covered on this list are subject to that? Michael: I don't. Pierre: Okay. So that might be something to look into. You know, you might think it's the lowest place but then you go to invest. Emil: That's right? This is only a starting point. We're leaving our our listeners with a lot of homework. Michael: Yeah, well, it's just I think it's such a good place to start. And especially if you go listen to the other episode and overlay. Okay, where are their affordable homes to purchase and also affordable property tax rates? Could be a new new market for you. Pierre: If you listen to more than two episodes, you will have heard Michael say more than more than five times call your county tax assessor. Emil: Michael “call your local county tax assessor” Albaum. Michael: Well, it's just one of those things like people are like, Oh my god, I totally burned by the property tax. It's like well, you didn't do the one thing that you should have done. It's so easy. Emil: Raise your hand if you fell victim to that on like your first or second property. That's me. Michael: Yeah, see? Pierre: I heard it. I heard it too a million times. Emil: Well, that's when was more so like the home in Indianapolis? I didn't again I didn't call the tax assessor I just looked at okay, what is it as a percentage? And I didn't look into Oh, for an investor it's higher so it's like you know during escrow I figured all that out. All in all still fine. Indianapolis is been a solid market could appreciate all those things. But again, you know, just got to go in eyes wide open. Michael: Yeah, it could have not been. Emil: Exactly It could have not been. The the joys of a bull market. Make Mistakes Michael: Still win. Emil: Feel the impact of a lot less. Alright, thank you everyone for tuning in. Hope this was a helpful episode for you. And we will catch you all on the next one. Happy investing. Michael: Happy investing. Pierre: Happy investing.

Our Top Tips On What You Should Do When Closing Goes Sideways

Play Episode Listen Later Jun 19, 2021 17:24

Sometimes closing on a deal is not so straightforward. Michael shares a nightmare closing scenario and we discuss how to mitigate struggles like these to stay on schedule, saving time and money. --- Transcript Emil: Everyone, welcome back for another weekend wisdom edition of the remote real estate investor. My name is Emil Shour. And today I've got with me, Tom: Tom Schneider, Michael: and Michael Albaum. Emil: And we're going to be talking about what happens when your closing goes sideways. So Michael recently had a refi on a triplex he owns and had some some challenges arise. And we're gonna just put them in the hot seat, learn what happened and learn how he deals with it. So you guys can get some tips and takeaways in case this ever happens to you down the road. So let's hop into this one. Alright, Michael said, set the stage for us. What what happened on this refi on your triplex. Michael: All right. Step back in time with me to December of 2020. So that's what I started this whole process. And my wife actually found this awesome lender out in the Midwest, they could land on this property that I owned inside of an LLC. And I was like, great, this is awesome. So we got the ball rolling. He got a couple different quotes. For me. He was a mortgage broker. That's what he did he so he wasn't the lender specifically. So he found a lender that was going to work. We said, Great, we got the ball rolling, we got the application process started. And then they said, Oh, you're doing some rehab work. So they went out for the appraisal, that's when they learned learned, quote, unquote, about the rehab work. And I was like, I told you about the rehab work. And they said, Oh, well, we can't we have to go back and do another appraisal once the work is done. So keep us posted. I'm like, oh my god. So that slowed things down to start, then we were supposed to close. And they said, Oh, you filled out some paperwork wrong. Yeah. Tom: Did you get charged for like a chip chart trip charge for the appraisal? appraisal. Michael: So I got a second charge for the appraisal, which they didn't tell me about until the closing statement showed it. It was only a couple 100 bucks. But I was I was still a bit frustrated, because they didn't like tell me that. And I should have assumed like, of course somebody has to travel to go do these things. But also at the same time, it seems a bit frustrating that they said oh, here's the price for the appraisal when they quoted it to me. And then the final amount being taken out at the closing is different, because they charged more for the appraisal example back second time, which they should have done because they knew about the construction. So that was a bit frustrating. Tom: Was the construction like really significant. Michael: It was a total remodel of a unit of the biggest unit in the in the triplex so fairly. Tom: King unit. Michael: Yeah. Yeah. So yeah. So then they tell me Oh, by the way, I know we're pretty close to closing, but you filled out some paperwork wrong. So on my statement of information to the Secretary of State of California, I put that the LLC was member managed. But when I initially filed and made the LLC, I put that it was manager managed. So those two documents didn't align. So they said, Oh, you got it, you got to change this. And I was like, all right. We should we're done about this earlier, but whatever. So I did that and filed an amendment with the Secretary of State, it really wasn't a big deal, like 25 bucks to do to do it all online. Good to go. Great. So now fast forward, the closing has already been delayed. They finally got through the re inspection of the property, as well. And they say, oh, by the way, this same issue happened in Alaska, where the property is, is physically. So you need to update that as well with the the secretary of state or change the operating agreement. I was like, why didn't you bring this up when you were scanning the documents that you had for California a month ago? Like a So anyway, to file an amendment, the Secretary of State of Alaska was much more difficult. It wasn't able to be that online. It was a whole process. And then I didn't get verification that it was accepted and approved. Until 18 business days later, was there a timeframe? So I said I can't wait 18 more days to close this thing. What options do we have? And they said, Oh, we can close load in your personal name. So I say Great, let's do that. And they said, Okay, well, now because it's gonna be a person's name, you have to click claim it out of your LLC and into your personal name. I was like, You got to be kidding me. So I quick claiming that out of the LLC into my personal name. And they said, Okay, yeah, now we're clear to close. So they reached out to the title company, and the title company was unresponsive. So then I reached out to the title company, the title, the closer I reached out to their manager, and everybody was giving me the runaround. Oh, we need more documents from the lender, and the lender saying, Oh, we need we gave everything to title. It's in title's hands. So days and days, days, this Thursday went on for like a week of trying to coordinate this thing with the title company. The person who the lender had on my case on my file was on the East Coast, but the title company was on the west coast. So there was several hour time difference. I mean, it was just like, the amount of people that got added to the emails each day grew exponentially. And I think Like the final set of emails, there were 12 people CCD on this, like it was a joke. Like they just couldn't get it. Right. So the loan finally funded this Monday, this past Monday, yesterday. And on Thursday, I think I got an email saying, Oh, we hope that this is from title, we hope that the lender wires over the money by Monday. And I wrote back and I was like you hope in a nicer house like you hope I was like, stop hoping and get this done? Who need to take responsibility for this? The lender has told me they've already sent you the money, where is it? When or when should I be expecting it? Please do not respond with you hope. I would like a plan of action going forward and someone to take responsibility, and I was nicer about it. But that was the gist of it. And that was the inner dialogue I was having in my in my head. So somebody wrote back to me, they said, We're so sorry for this confusion. It will be in your account Monday morning. And I say, Great. Thank you for the confirmation. I look forward to seeing my account Monday morning. So Monday morning rolls around, the lender emails me and says, Hey, confirm with us when you receive the funds. I said, Great. No problem. We'll do 10 o'clock rolls around no funds. 12 o'clock rolls around no funds, but as they're… Emil: Keep hitting refresh. MIchael: Yeah, refresh. I was like, Hey, you told me is gonna be my account. Monday morning. I know, we're in the same time zone. There's nothing here and there's nothing pending What's going on? And they said, Oh, it should be there. And I said, well, it's not. So there's a lot of money out in cyberspace that you need to figure out where it is, and tell me when I should be expecting it. And they said, Oh, we are our servers have been slow. You know, I did it personally, it should be there. So then finally, about two o'clock, it shows up. And I say Great. Thanks, everybody. This was ridiculous. So that was a really long winded way of basically going through what was a nightmare close, and a lot of takeaways that I had from this and other closings that have gone semi sideways, as well as that you really have to be your own advocate so much of the time, just because the lender says they're working on it doesn't necessarily mean that they are or just because the title company says they're working on this. I mean, they necessarily are. And so don't assume I feel silly saying this, but like, Don't assume that people are going to do the things they say they do. You really have to follow up with them and really be the driver, and also making sure that everybody's communicating. At no point should I have had to step in to email, both the title company and the lender on an email together and say, hey, why aren't you communicating better? Why am I the intermediary for my own loan? This is ridiculous. Tom: Michael, not a not a big hope guy just doesn't really believe in hope, it's just kidding. I'm just kidding. That's pretty funny. I hope it funds. Okay. So yeah. Yeah, question for you here. So did you select the title company, or did the lender select the title company? You obviously selected the lender? Michael: Here's the here's the funny part. So I wanted to use Spruce Title, who we use a lot of Roofstock. And I have a personal relationship with we had them on the podcast. They helped me do some things in Southern California to do a quitclaim deed, which was awesome. And so I said, Hey, Spruce, can you do this? And they said, you know, we really don't do a lot of business in Alaska, we would prefer to have your lender, your lenders title company, do it whoever they use, but when in a pinch, let us know we can we can try to be of some assistance. So I thought that we were lined up. I thought we were using spruce. It wasn't until push came to shove at the end of this when they told me Oh, we're using this other our title company that we use a lot. And now I'm sitting here scratching my head, looking at hindsight, being like, Are you freaking kidding me? This is the company that you chose over mine, are you insane, so it was just really frustrating. It was really frustrating. And then I also asked him, I was like, both the lender and the title company. So you're really going to charge me full price, you're really going to give me all these fees, and everybody keeps giving me the runaround Oh, well, it's the other company that's causing the delays. So you know, our fees are set. I said, Man, this is just unbelievable. So I don't think I'm done fighting that battle yet. More so over principle than anything else. I mean, the fees were not exorbitant. I think they were, you know, reasonable for what I got. But still to make me have to jump through all these hoops at the 11th hour to make me have to do all the communication and I'm like, Am I doing your job for you at the end of the day? Come on. This is This is ridiculous. So and then not the lack of response, I think is what really gets my go. It really grinds my gears. When people are asking for things that need to happen in a timely manner and just lack of response and I get people are busy, but some acknowledgement of Hey, we're working on it. I mean, Emil, you and I talked about this all the time you sent me an email, it's crickets. If you can't get to it, just acknowledge that hey, won't get to it'll tomorrow. Or hey, we'll get back to you in a day, whatever. Something to let me know that someone on the other end has put eyes on this or is as has a pulse at least. Tom: Are there other little tricks you do within your emails when you're responding to them like Hey, are you the right person to contact for this like Basically like having them, like accept ownership of whatever that like specifically. I mean, that's that's brutal Michael, that you had to kind of jump in and quarterback, you know, between these these two companies, but I love it. Do you have any kind of pro tips like on writing these types of emails? I mean, one of them, I would just chime in with, you know, be direct, but don't be a jerk. But is there any other kind of like thoughts you have in being proactive with email, which I think is like the right thing to do? And you can see that it's like, getting a little bit off kilter? Michael: I think that's a really great tip that you offered almost in your question of Hey, asking, Are you the right person? Tom: Thanks Michael. Michael: Yeah, absolutely. Tom: So I threw it off the backboard and just dunked it. Michael: We read it the Roofstock Academy book club, a book by Chris Voss called never split the difference. And he talks about if you're not getting responses to emails, a way that you can write in the email is, have you given up trying to assist me in resolving this problem, or something to that effect? It's like, a little harsh, but Tom: That sounds a little harsh. I like it. I like it. Michael: It is it is a little bit harsh, but also how many times you're going to bang your head against the wall with somebody who's not responding to your emails, or phone calls, or any kind of other communication? That's kind of the the question that needs to be answered. Hey, are you are you done talking to me? Are we just giving up here? And so I've only done it a couple of times, and it tends to work pretty well. I've been cc on an email where that was sent. And I was like, hey, that seems pretty harsh. Not sure that was appropriate. So I would definitely make sure it's a last ditch effort. And, you know, there are ways to word that in a more light hearted manner. But I think absolutely, oftentimes, it is justified. I didn't come to that at this. But I think that that's a really great tip of Hey, asking, Are you the right person for me to be talking to, and then also see seeing anybody and everybody that can help? So managers, managers, managers, because so often, if the chain isn't consistent, things get lost in the email thread. And so adding people and subtracting people mid thread is difficult. So I'd say just make sure everybody is on on the train and communication with one another from the start. And that's helpful. Tom: Yeah, I'd say one thing too, when you're adding, you know, more and more people on email, I think sometimes people could see a lot of people in email and like, think like, Oh, this isn't necessarily me. So like, within the body of the email, you know, if there is a lot of people on it, I'll do an @ Michael album, like or @ whoever you're talking to, just because sometimes if you you're looking at an email, and there's a dozen people on you'd be like, oh, somebody else is gonna pick this up totally. So you know, use that kind of wider spray, but then use the little, you know, direct shot within the within the body of the email. Michael: Such a great point, such a great point. Emil: So to summarize, the big takeaway, I think, here is that the buck stops with you, you kind of have to, like you have to quarterback the whole thing, right? Is that the big takeaway, that you should own the process? As much as you can? Michael: Yeah, well, I think you should be, you should be ready, willing and able to quarterback the process should you need to, I don't think in 90% of the instances, this doesn't happen. And things go smoothly in the title, company and lender work cohesively together. And you sometimes need to nudge people along and make sure everybody is talking and playing nice, get in the sandbox. But I absolutely do think that if you are going to play in this space, you need to be willing to be able to do this kind of stuff. Because this stuff happens clearly. Emil: Right? I wonder if this is more of a refi thing, because I had the same thing on my Indy refi, where I had to do a lot of communicating between lender title and even like mobile notary, I had to set it all up and like coordinate with everybody so that docs were getting to the right person at the right time so that I could sign and everything. So I don't know if it's a refi thing, or maybe that's just coincidence that both of us have had this experience with refinances, but yeah, interesting. Michael: It's so funny, you mentioned that, I mean, I totally forgot that part of the story. So at the end, at the like, the 11th hour, the title company finally gets back to me says, oh, we're gonna schedule a mobile notary. And what's your address? And we're going to hit the mobile notary and they'll come out and do sign docs. I said, great. That's awesome. This is my address. And I was actually out in Colorado at the time. So this was I don't know, like, noon or two. And I was like, it's getting late. So if I need to go to the local notary store, let me know they said it and I will schedule mobile notary so great. This is we'll get back to you when we have something that's perfect. So, five o'clock comes and goes six o'clock comes and go seven o'clock comes and goes, I don't hear anything from anybody. So I called her love to message their offices, of course close as an emails, Hey, didn't hear from you or isn't mobile notary. Nothing happens so I was like great. And in the morning, we were headed out to Utah to the National Park making our way back to California. So I get this call at like seven o'clock. And this guy's like, Hey, I'm Have a mobile notary, are you? Are you still okay to sign? I'm like, No, dude, I'm on my way out of town driving to Utah. Like, no, he's like, I got an email last night. I didn't see it. Can I? Can I be there in 20 minutes? I'm like, Yes, fine, come in 20 minutes. So he signed all the paperwork knocked it out. I was like, Oh my god, everybody's dropping the ball. Emil: There's a lesson there. And that and this is something I've learned recently, if you're a remote investor, which if you're listening to this show, you most likely are, you're gonna have to deal with mobile notaries all the time, you can't, you can't sign in person typically, right? Because your lenders not local or whatever it is, find a mobile notary near you and add them to your team for anytime you have closing Doc's like, I use the same person now he lives, I think five minutes away from me, I coordinate with him, him and I like know each other now, and it's so much easier to handle that stuff and make sure they're in the loop when you know the person and you use them over and over again. So that's something I recently started doing. Michael: I was in Tahoe, Nevada, on vacation, and I had to sign something and they're like, oh, it has to be a California notary. I was like, Oh my god, are you serious? So I had to drive across the state border and then look up like a mobile notary and find them and they were like you coming to me I just broke my back like, Oh my god, what is going on? So I think there's other takeaways just be flexible, be versatile, you know, be willing to flex a little bit because not everything is going to be the same as it was in prior closings. And especially with the remote aspect, things just are different. So be aware of that and be willing to Yeah, to just be flexible. Emil: And things don't go smoothly. We try to hammer that point home right? You got to you got to be ready and accepting of the unexpected because that's kind of just real estate and especially with just lenders and closing and docs and all this stuff. It never goes according to plan smoothly, at least from my experience. Tom: Be comfortable being uncomfortable. Michael: Yeah, that's it. Emil: Alright guys, any any final words before we wrap this one up? Michael: Just be in constant communication with everybody who's involved? Emil: Yep. Alright everybody. Thanks for joining us on this weekend wisdom. We will catch you all soon. Happy investing, Tom: Happy investing. Michael: Happy investing.

california man state colorado utah llc alaska southern california midwest nevada secretary east coast indy doc national parks top tips emil sideways tahoe chris voss tom king spruce ccd roofstock michael it michael yeah tom michael michael albaum tom yeah michael here michael all

iACast 156 - Go Big Or Go HomePod Mini

The iACast Network

Play Episode Listen Later Mar 20, 2021 40:45

google apple android reddit ios paypal found ia slack go big homepod airtags hims imac pro homepod mini apple's airtags jason earls michael all iacast

iACast 156 - Go Big Or Go HomePod Mini

iACast

Play Episode Listen Later Mar 20, 2021 40:44

Show Description On this episode, Michael, Taylor, and Jason discuss Apple's discontinuation of the original HomePod, and iMac Pro. News Apple discontinues the original HomePod and iMac Pro. For more info, see the links in the show description. Evidence that supports the eminent a-rival of Apple's AirTags was Found in the Find My app in the iOS 14.5 beta. Hims has launched the BrailleSense 6. Google released the Android 12 technical preview. Ad iAccessibility app development services Picks Jason: TalkBack version 9.1. Taylor: GeneratePress Michael: The Expeditionary Force Book Series Providing Feedback We love hearing from you, so feel free to send an email to feedback@iaccessibility.net. You can follow us on Facebook, and Twitter. You can also find us on Reddit, and all around the web. Also, don't forget to check out our YouTube page, and for all things iACast, check out our iACast page. If you'd like to help support us, you can do so via our PayPal and Patreon pages. If you wish to interact with us during our podcasts live then please do join us on our Slack channel. Show Transcription MICHAEL: Hello, everyone and welcome to another episode of the IA cast. All right, with me today, I have the usual group. We have Taylor Arndt, TAYLOR: Hello, everyone, MICHAEL: and Jason Earls. JASON: Hello, everybody. MICHAEL: All right, we have a great episode for you today. And you know, we've been gone for a few weeks. We had a kind of a crazy storm And then we wanted to get back on a regular schedule. So, we're back with a new episode to talk about all the interesting news that's happened recently and some rumors and news and a bunch of different things that have happened. So, let's jump right into it. Our main topic for today is the first news item, and that's the HomePod being discontinued. And I have very mixed opinions on this. JASON: I do too. I kind of understand why Apple discontinued the HomePod. Also, they discontinued the HomePod! It's okay, HomePod buddy, I still love you! As I pat my HomePod. MICHAEL: Didn't we have a hashtag for a while, pet the HomePod? JASON: I think we did. TAYLOR: Hilarious. JASON: I was just trying not to pat the screen because I didn't want music to happen, but that would have actually been really funny. MICHAEL: I think I have a picture of headphones sitting on a HomePod. JASON: Oh, yeah! The Andrea Cans! MICHAEL: Yeah, yeah. JASON: But yeah, on one hand, I understand why they did it because it was at launch a what, $350 Smart speaker that couldn't do terribly much more than play music. I mean yes, it sounded good, But you know, it's not what people were looking for in their smart speakers. Especially considering the likes of the Echo devices, the Google Home Hubs or Homes at the time. And you know, the HomePod's been around for like 4 years. So, in one respect, I kind of understand it. And you know, the HomePod Mini does have some features that the big HomePod doesn't have regarding the U1 chip and everything. But at the same time, the HomePod does sound so good! And as good as the Mini is and as great sales figures as the Mini is because of its price point and everything, you can't argue that it just does not sound as good as the big HomePod. TAYLOR: Right. But I think if we're thinking about it, the majority of consumers, they may not be in depth with audio and they may not understand that the HomePod sounds the way it is and that they want to pay for that. Because a lot of them just want to listen to music, and they want it to be portable. And so, that's where I think it's coming down to. Like, I understand why they they discontinued it, but yeah, it's kind of sad. I mean personally, I don't have a big HomePod, but that's because in a small apartment, I just don't have a lot of room. JASON: Right. And, you know, they did say that they are still going to push out software updates for the big HomePods and support the Apple Care which is good because I just got Apple Care last year. TAYLOR: Oh, that would stink otherwise. JASON: Right? But like, I really want them to come out with a bigger HomePod for 199. That's what I'm hoping for, even though they publicly said to I think it was like iMore or whatever that they were in fact focusing their efforts on HomePod Mini. Because let's think about it like this, the big HomePod — you know, Apple slash the price to 299, right? So, for $200. You could get two HomePod mini for less money than one bigger HomePod. Now, that doesn't mean it's going to have the bigger, basier sound of the HomePod, but at least you would get stereo audio and stuff. MICHAEL: Well, let's leave this part for the end because we're already kind of diving in. JASON: I know right? I like, I got thoughts I'm sorry. MICHAEL: But the other bit of news is the iMac Pro completely was discontinued and they're only selling them while supplies last JASON:That I'm not sad about. MICHAEL: In a way, I am. I think it was a great product, but I think we're about to see something new come from Apple. And as usual, we will be doing a live stream of that event. At least that's the plan. We'll be doing a live stream of the Apple event when it happens later this month. Because we do know for certain, right, that there is an apple event? JASON: I don't think we do know for certain. I just think speculations hide that there may be one, at least last I checked. But March 23 is the rumored date for the Apple event. I also haven't really looked at the news today. So things may have changed. But last I knew it was a hypothetical thing at this point. I mean, a highly likely thing at this point. MICHAEL: And I think it's because they're discontinuing these devices and the fact that we have so much information in the code about our next topic, and that's potential AirTags coming soon. Because there's mention of them in the find my app. TAYLOR: Yes, there is. MICHAEL: On the beta TAYLOR: Which is awesome because I've saw YouTube videos. Obviously, I don't have the beta myself, but I've seen YouTube videos that have mentioned it. Obviously, when you're on to prepare for the podcast just kind of looking at all the news. And but yeah, definitely pretty cool. And hopefully, hopefully they work. I mean, Tile's nice, but it'd be nice to have something built in and integrated for finding stuff. JASON: Right, and I guess Apple's opening up the FindMy protocol so that companies like Tile could take advantage of it as well. And it's nice to see that they are opening up more of their frameworks and things. MICHAEL: Well, and I think that's because there's been so much blame for antitrust and things between them and Google and things like that, that they're trying to make sure that they stay open — JASON: ahead of that, Yeah. MICHAEL: Because Google's had a lot of problems with that because they're in everything. The last bit of news that we have is, and I won't make any jokes, Jason, I won't do it, I won't do it. Those will be left for off the podcast, the BrailleSense 6. And I only make this joke because if you want to learn more, head to hims-inc.com/bs.6 . And I'm not kidding. Take all the jokes from that you can. JASON: Exactly. MICHAEL: Basically, we have the BrailleSense 6, and it was announced this week at CSUN. From what I've been able to tell, it was one of the biggest announcements because there weren't a lot of announcements this week. And the BrailleSense 6 dropped the Polaris naming. And it's Android 10, 120 Gigs of hard drive space, 80211AC wireless, a battery that while under load will drain 21% in an hour and a half if doing the max amount of work. That's the only battery statistic we can get. It has SD card slot, it has two USBA ports, a two USBC ports, a headphone jack, supports microphone, The, what is that called, Jason? JASON: I think it's TRRS, actually, I believe is the technical standard which is basically what this microphone that I'm using is, which is, think the older headphone jacks on the iPhones or the the headphone jack on the Mac. So it's that single microphone combo jack. MICHAEL: And it has all that, it has new software installed. And the person doing the presentation was using Zoom on the BrailleSense. So that's pretty promising. The only concerns I have are if it's going to get Android 11 and up, and how well the software is going to work because the Polaris had a lot of issues with deleting documents and things like that. JASON: Yeah, the BrailleSense Polaris is a very interesting device. I think it also actually Michael, in addition to the headphone jack, I think they said it also has a stereo line in Port as well. So you could connect music things to it, you know, binaural microphones really would work I would imagine to it. MICHAEL: Nice! JASON: Did you mention that it has 6 Gigs of RAM? MICHAEL: No, I did not. TAYLOR: Nope, you didn't JASON: So yeah, it's got six Gigs of RAM, an 8 core CPU. I don't remember if they announced the clock speeds of it, but — MICHAEL: It didn't. JASON: So, it really does seem like a very interesting device and — MICHAEL: And it's gonna cost 5799, come out in June. TAYLOR: Yeah. Wow. That's a lot of money. JASON: So we do know, the battery will be user replaceable though because they talked about that at the CSUN announcement I think MICHAEL: they do offer financing and trade ins for your older devices, so those are options to get you a lot closer in price to those devices. So JASON: Yeah, it's a very interesting device. I do worry what the battery life is really going to be like, TAYLOR: Right, and also if it can — like some note takers have a problem where they fall behind mainstream. And so that's the other concern too, is that like, you buy the $6,000 device almost. Well, it's already running two versions behind of Android almost at this point. 12 is beta. So that's the other thing too. These notetakers I mean, they're great for what they are, but you know, it's a specialized thing, and they're not always up to date. JASON: Like I said to you guys, I think off the show, if I were to get a note taker, it would probably be the BrailleSense. You know, the BrailleSense 6. It's so weird that they don't have a name for it now. TAYLOR: I know. MICHAEL: Alright, you know, and we could have a whole episode on notetakers, but I think we would want to have somebody on that can talk more about Braille and mainstream versus notetaker because I think that would be a very cool discussion. So TAYLOR: Yes. JASON: Yeah, I do too. Because I mean, I've used the BrailleSense in the past, but the BrailleSense I used was, I think, even before the U2. So, it was definitely not any of the Android based BrailleSense devices. So MICHAEL: Another thing that's happened, the last news topic I really could think about, is Android 12 is in technical preview. We really haven't talked about that. And I hear it brings a whole lot of user interface changes, but not a lot of — you're not going to be able to notice it very much with Talkback. JASON: Yeah, that's true. I have been playing a little bit with the beta. After a couple false starts, I eventually got it on my Pixel. I accidentally installed the version of Android, that AOSP version, so it didn't actually have a screen reader which is why I wasn't getting speech. TAYLOR: Oh, no. How did you fix that? JASON: I pre flashed it — MICHAEL: Very carefully. JASON: I was — TAYLOR: Yeah, very carefully. JASON: Yeah, very carefully. So yeah, I reflashed it, because you can actually go to the Google developer site, and you can actually use their online flash tool, and it will basically do all the work for you MICHAEL: Online? That's cool! JASON: It downloads the image to the device, you have to enable some things like OAM Unlock, and whatnot, it'll download the image to the device, and it will tell you when it's safe to unplug your phone at which point it should be booting into the beta of Android. MICHAEL: That's fancy. JASON: I know. MICHAEL: And talk about the security implications there. I mean, it's Google, and they have all the security keys and all that. But could you imagine if somebody were to spoof that, and be able to put a knot legit version of Android from a website? JASON: Yeah, I know. I did actually think about that. And then I stopped thinking about it. TAYLOR: That might have been a good idea. JASON: But like I said, I do have Android 12 installed. I don't notice too much of a difference. Although honestly, my Pixels not my primary driver, my primary driver's my iPhone. So what I can say though, is that 12 does seem to be relatively stable. And along with the introduction of Talkback 9.1 which is not specific to Android 12, I do think that the Android experience is going to improve a bit which is nice and awesome to see. MICHAEL: Yeah. So, it's really cool that, you know, we have the ability to flash these devices remotely. I think it's really neat. But we'll have more information about what's in the beta for Android 12 in a future episode, but I think it's really cool that we have the ability to do that, and to try these things before they come out, you know, iOS, Android, Windows through the Windows Insider program, and things like that. JASON: I think the one thing that was kind of annoying to me though is — and maybe it's just I did it in a way that made this happen. But it ended up forcing me to reset my phone to flash the version of Android 12 on to it. And of course, when I had the version without talkback, I didn't mind resetting my phone. And I think if you downgrade back to Android 11, I believe it will make you reset as well. They do tell you that. So MICHAEL: you know, I love how my watch made a noise even though I have — typically if I mute my phone, my watch will mute with it, but not this time. JASON: Oh, interesting. MICHAEL: Yeah, usually it mirrors but not this time, that's interesting. All right, so for our ad part of the show today, I want to talk to you guys about app development services that's offered by iAccessibility. iAccessibility offers app development services for iOS and Android at $50 an hour where we will build your app from the ground up based on your website or however, whatever app you're trying to build. And the app will be accessible and usable by all users. Unless it's a game that you really need specific use cases. We'll still try to make it as accessible as possible, though. So,, we've built apps like VO Starter, we've built apps like Pocket Braille, Blind Bargains, ACB Link, And that's just a few of the different apps on a lot of platforms that have been created. So $50 an hour minimum of $1,000 and you can have your app in the iOS and Google Play app stores. So you can go to iaccessibility.net to learn more, and we will be promoting that more on the website. So, people look out and we'll have more information. So thanks for listening to the iACast. And now on to our main topic for today. And we've already talked a little bit about that, and it's Apple discontinuing products like the HomePod. And you guys, I — this is — I feel like this is the most products that Apple's discontinued at one time. And you know, Microsoft has done it. I mean, they discontinued a whole store line. Google, Google is the project killer, they are known for that. Do you guys think Apple's kind of jumping on board that train, JASON: I think in a way they are. I really think what they're trying to do is they're trying to streamline their product line, and you know, not have so many variations of things around. Especially in the case of the iMac Pro. I keep wanting to call it the MacBook Pro. That is a different product. But the iMac Pro because they really want us all to move over to Apple silicon, which, you know, I'm personally fine with. So I really think that's part of it. And, you know, as far as the HomePod, I like to think that they have something new planned to replace this beautiful, soft, lovely mesh, big HomePod that I'm totally like rubbing a finger against right now because it just, it's fun! MICHAEL: Hashtag pet the HomePod. JASON: Exactly. But you know, I really hope that they do have something to replace the bigger HomePod with at some point soon. Because, yeah. TAYLOR: Yeah. So the thing with that is that, I think, like I said, a lot of these companies are doing that right now. They're just trying to streamline. And you know, Google has been doing it for years. Microsoft kills things. But Apple, like I said, this is really a first. They don't really do this all that often. And so, either one of two things, they either have a lot more products coming and they need to get rid of stuff, or they're just trying to streamline because a COVID and everything, obviously, but we've been in COVID for over a year now. So who knows. You know, they're just trying to get things streamline. Or if they are trying to add new products, but they need to get rid of some first. MICHAEL: And it might be — it might just be that they don't plan to update. Oh, well, actually, you know what? I think the Home Pod runs on the processor that the iPhone seven runs on. Isn't it, Jason? JASON: The big HomePod? Yeah, it's the A8. MICHAEL: Oh, wow. And I think that's the next on the chopping block this year, guys. TAYLOR: iPhone seven, you think next? JASON: I think well, the seven has the A9, right? MICHAEL: I don't remember — JASON: No, wait a minute. No, I think the A8 is from the iPhone 6. Actually. MICHAEL: But I remember the 6S is the last version — iOS runs on the 6S. And so I bet the iPhone seven will be the final version that 15 will run on. JASON: Oh, that's possible. I mean, at the same time, they did actually change the foundation according to some tech sites. They did change the foundation of what HomePod OS was. So for a while it was based on a foundation of iOS. And then I don't remember when this happened. But supposedly they ended up changing the foundation from iOS to TV OS so that it wouldn't have as much code and things in in the OS that isn't really needed and used by the HomePod. So I was kind of not expecting to see the cancellation of the big HomePod for another year or two yet. I was a bit surprised. But maybe — I mean, I was going to say maybe this has something to do too, with the silicon chip shortage. But that would probably be more to do with the Mac, I would think maybe then the homePod. MICHAEL: Well, it's interesting because I'm wondering if they're going to rename the HomePod Mini eventually to something else. Or if we're going to have the HomePod Pro, come out and then put a new device in later on in the HomePod category JASON: Right, or the HomePod Max. TAYLOR: Right, or the HomePod Pro Max. JASON: I don't think they'll do Pro — well, I lie, 12 Pro. — MICHAEL: If you think about it, on the Mac, we don't have a MacBook, we have the Mac Mini, the MacBook Air and the MacBook Pro. We don't have a Mac Book or the Mac. TAYLOR: Oh, right. MICHAEL: So that might be kind of the landscape we're looking at for HomePod for a while. JASON: Maybe. MICHAEL: Because if you notice the mac book that came out like 2015-2016– JASON: 2015-2016, I think 2016, yeah. MICHAEL: It was short lived as well. So you know we have the air and the pro that are still around but the flagship name was was discontinued quick on that line too. So that's kind of interesting to think about. JASON: Yeah, it really is. And I think the one thing that's keeping me from being complete and utter 100% distraught that the big HomePod is being discontinued is just the fact that the — and I think I said this before, that Apple did say that they are still going to issue software updates for the big home pods for the time being, and supported still through Apple Care. MICHAEL: I'm wondering if you put two HomePod minis in a room, if you get the same quality sound as one big HomePod, JASON: I think you would get the same overall quality sound, because the HomePod Mini does seem like it sounds very similar to the big HomePod just without that deep low bass that the big ones can hit. MICHAEL: Yeah. And I don't know, it's to the point where when we look at these devices, it's hard to it's, and you know, maybe I'm just, my train of thought just keeps going all over the place. But the more I think about things, maybe this is a way for tech companies to dispel rumors and leaks by just saying, we're going to discontinue this, we're going to change this. And so it kind of throws people off to know what the next step is going to be. JASON: Yeah, maybe. I think though, in the case of the iMac pro being discontinued, we all know, it's most likely going to be because we're going to be seeing an apple silicon based iMac. Now whether we see that on March 23, which I personally don't think we'll see. I will say that on the show. And I'll be very happy to be wrong. But I don't think we're going to see that on the 23rd. MICHAEL: I think we will, I think that's going to be the focus is iMacs this year. JASON: I don't know, I think we might see things about AirTags and iPad pros and stuff, but we'll see. If I'm wrong. I'll be happy. Michael: See, maybe we need to come up with the accessibility pool. Because what I think we're gonna see and take your bets people. TAYLOR: Okay, MICHAEL: I think we're gonna see iMacs, colored iMacs, I don't think we're gonna see iPads just yet. But that's just me. Now, in saying that, iPads have come out in March before. So it's not out of the norm. But IMAX used to be used for education as well. And so if they bring out the colored iMacs like they had for education in the past and kind of marketed towards that, I could definitely see that being a march thing. And plus, iPad Pro has typically has an 18 month life cycle. It's only been 11 months since iPads have come out. So in other words, this is Michael trying to say please let my iPad be relevant in April. TAYLOR: Well, I have to agree with Jason on this one, Michael. Because, like I said, with all the evidence and stuff, I think it's gonna be AirTags and stuff. But again, if I'm wrong, I'll be more than happy to admit it. But I really think I have to agree with Jason, Michael. MICHAEL: And who knows, we may see all these things. I doubt it but TAYLOR: That'd crazy. JASON: no, you know what's really gonna happen. Apple's not actually going to have a product event on the 23rd, they're going to just announced their new products quietly on their site. And then we'll all be wrong. MICHAEL: And it could happen, it could happen. JASON: I do think though regardless, as sad as I am to see the big HomePod be discontinued, and like I said, me personally, I'm not terribly upset about the iMac pros cancellation and we're excited because, you know, that just tells me to watch out for the iMac. Not that I'm going to get one but it's still always fun to see what they're going to come out with. I still enjoy my HomePod. You know, I still plan on using it until something happens. Like, if nothing else using it until Apple decides they're not going to update it anymore. Whenever that may be, so. MICHAEL: Well, and that shows me that them discontinuing these things that just, especially on the iMac side it means that they have something new coming around the corner and they may decide that the pro line of iMac just isn't needed anymore because of what the A1 and A1x will do for these devices. I mean — JASON: You mean the M1? MICHAEL: Yeah, the M1. JASON: It's a processor, Michael it's not steak sauce. TAYLOR & MICHAEL: Right. MICHAEL: That needs to be the name of an episode sometime. Our previous episode title we came up with it is going to be it. JASON: Yeah, but that would be hilarious. 156 It's a processor not steak sauce. MICHAEL: All right. And you know, I wonder if that's why they started with a4S. JASON: I don't know. MICHAEL: Because Could you imagine Apple naming, now introducing our first processor line, the A1. JASON: and then Could you imagine the hilarity in covering the lawsuits, if that would even happen. That'd be funny. MICHAEL: Anyway, would that'd be a coprocessor for for Intel the A1 because it has to go along with it to make it better? TAYLOR: I don't know, would it be? That's your call. MICHAEL: I mean, if we're comparing Intel to steak there would be A1 processor from Apple to JASON: They'll call it, I don't know, I was gonna say steak Lake, but that just sounds weird. Dinner Lake, MICHAEL: Dinner lake. All right, out there. There you go Intel. When you come out with that chip that everybody wants just say time for dinner. Like, JASON: Exactly. MICHAEL: Anyway, I think this is the most jokes we've told in a podcast. And I really think that the M1X will really be like, there's no pro version of that, there's no way to up the process or on that. So there's, on the Intel iMacs, you can get i5, I7, I9, and you have the better display on the Pro, which they can still do the better display. But if the display is already going to be amazing in these new iMacs with the new chips, then they don't have a need to do that. So, there may not need to be an iMac pro because the new iMac will just be able to boast that it's pro already with the built in Apple silicon. JASON: And that was kind of my thinking, when I first read about the cancellation of the iMac Pro, I was actually thinking as you were talking and I don't really think Apple's gonna do this, if they came out with instead of the M1x. Or the M1 2, having the M1 Pro, but I really don't think they would do that, considering they already have products in their pro line that have the M1 and that would confuse people. MICHAEL: Right. But, you know, I just think that they're going to, I think that they — now that we're looking at coming slowly out of COVID, they're going to be looking for the best way to sell their products. And if you could just say, look at the shiny new products we have in our stores aren't aren't these amazing, people are going to want them and especially if they start doing these colors, like they've shown on concept art and things like that, that that are rumored, that's just going to be amazing. JASON: I mean, look at how popular the new Macs have been already, you know, because working from home and they've got that long battery life and the slightly upgraded camera because of the ISP MICHAEL: And you know, I'm doing all this on an M1 Mac, the recording and Zoom, and all that. And I keep telling people it's the better of the two machines. I mean, this is still a terrible camera, but I'm looking at my face on here. And it looks a lot better than my other Mac did, by far. So Apple has really gone a long way with what they're doing. All right, do you guys have any final comments we want to give before we wrap up today? JASON: Steak! MICHAEL: Yes. TAYLOR: Oh my God! JASON: No, I'm kidding. But you know, it's very interesting to see these product cancellations. I keep flitting between I'm sad, especially for the HomePod. And it's because there's going to be something new, like, a lot of me is just like, This has to because there's something new. So it's going to be very interesting to see what actually ends up happening. MICHAEL: Well, you know, the interesting thing, I want to point this out. The interesting thing about the home pod Mini is you don't need to plug those into the wall. JASON: Right. MICHAEL: And that's really interesting. I mean, you could build a USBC — you could buy a USBC hub, plug it into the wall and have five home pod minis hooked up to that thing — TAYLOR: In a power strip. Yeah. MICHAEL: Well, not even a power strip, just a USBC hub. TAYLOR: Oh, wow. Oh, yeah because it doesn't even plug in to the wall. Wow, I'm not thinking JASON: Or a battery pack. MICHAEL: Yeah, you could hook it up to a battery pack. And so that makes it almost more usable than the echo. TAYLOR: Yes, Yes! MICHAEL: And so I think that's why Apple really wants to focus on that because they're like, there's so much possibility here. TAYLOR: I wouldn't blame them. MICHAEL: I mean, it sounds better than any echo. I'm sure. I don't know, I haven't heard one yet. But JASON: Review say they do. MICHAEL: So, you know you put a few in a room. You're gonna get good audio. The only thing that you can't do is use the standard stereo speaker — or TV speakers. JASON: You can, they just won't — I just don't think they'll do Dolby Atmos and stuff that the big HomePods do. MICHAEL: How would you do — oh, well, Apple TV speakers, but how would you use the standard TV speakers? JASON: Oh, okay. Yeah, I misheard. I thought you said Apple TV. Yeah, you can't use Well, you can't even use a big HomePod as a standard TV speaker. So that's not MICHAEL: It's not new. Could you imagine if they came out with the HomePod sub where you had 2 of the apple speakers of the homepod minis as your regular speakers? Now, that's a possibility. JASON: That's actually funny that you mentioned that because I was talking to somebody pre show about that. And what they had said is, Apple comes out with this sub and then gives it 2 USB C ports so that you can plug two HomePods directly into the wall or something. I don't know if that is what they're going to do. But that would certainly be interesting. It'll definitely help with the idea of, I want to have stereo speakers, but I need two outlets if they decided to go that route. So who knows? MICHAEL: Yeah, I'm really excited to see what they do. I mean, if they bring out a HomePod sub, I will press that Buy button immediately. I'm not kidding that if they did that, you know, I would buy a home pod sub. And it kind of makes sense, guys, I think that's actually probably what they're going to do. Because it would make money for them. If you had to buy two HomePod Minis and A HomePod sub. Let's price the sub at $200. They're making $50 more off of you then if you bought one HomePod. Now, granted, they're not going to make 600 or $700 if you had to buy two regular HomePods. But, who's gonna do that anyway? TAYLOR: Right. JASON: Yeah, that's true. I think though, the only downside to this is, as it stands right now, if you were looking to buy HomePods, new, that would do Dolby Atmos, you can't, because that was a feature specific to the bigger HomePods. And I don't know if it's because the eight is more powerful than the S5 or whatever CPU the minis have inside, I think it's the S5 or if it's just that the Mini. , I mean, the big HomePod has more microphones, and it's not limited to the chip. But as of right now, you can't buy new home pods directly from Apple. If you want to do Dolby Atmos. MICHAEL: actually you can for right now during the time of this recording, but. JASON: I didn't even see a link in the store for the HomePod when I last looked. MICHAEL: So I just looked, and they're still in the Apple Store app for 299. You can pick either one. JASON: Oh, they have the Space Gray ones back? MICHAEL: Yeah, they're showing both of them, at least when I looked it showed a picture showing both of them. JASON: Oh, that's interesting, because I knew for a while that they only had the white ones around. And it's very interesting then that I couldn't get to them. Because on the Apple Store, on Apple's website, if you wanted to see the HomePods, the only way it was able to find them is by going under the Apple Music link. And they talked about the HomePods and the AirPods and the AirPods Max. The only HomePod they listed was the HomePod Mini. Whereas the big HomePod used to be there. So that's interesting that they still show up in the Apple Store — MICHAEL: Yep, they are in the Aplle Store app. Yeah. JASON: And of course you can buy them from other retailers. It's not just Apple that sells the HomePods but MICHAEL: And since they're discontinued, I would wait so you can get them from Best Buy or somewhere else where they will be much cheaper. TAYLOR: Yep. JASON: Just keep in mind, if you're going to go that route, that we don't know how long Apple is going to support the big HomePods with software updates, even — All we know is that they are still going to support them. MICHAEL: Alright, well, that's gonna do it for our show today. Jason, to end us off for today, where can people find you online? And what's your pick? JASON: So my pick is, funnily enough, not an Apple product, but rather a Google product. MICHAEL: Ah, just wait. It'll be discontinued at some point. TAYLOR: Probably Well, next week. JASON: Specifically, my pick is talkback version 9.1. And I pick it because it enhances talkback by allowing you to use multi finger gestures. Finally, it has a Braille keyboard. Although, the Braille keyboards been there since 8.4 I think it was? But I really find I like the multi finger gestures. I like the new unified talkback menu. And it's just, I just love this version of talkback compared to the older ones, because I can disable the angular gestures and the proximity sensor silencing speech. I can turn that off now because you can now tap with two fingers to pause speech. MICHAEL: Oh, that's fantastic. JASON: And the magic tap gesture for iOS users is there. And so it's really nice. You know, they don't have the rotor as such. I mean, you can't rotate two fingers on the screen or whatever, but they definitely do have an easy way to navigate, granularity and stuff now and it's all customized Pretty much. So talkback 9.1 it's pretty nice. So that is my pick. As far as where people can find me, you can find me producing content for iAccessibility, you can email me at Jason@iaccessibility.net. And you can also follow me on twitter at jde 1. I know that I have been giving my Facebook out in past episodes, I have decided that I will no longer give that out. I no longer have the app installed. So yeah, those are the ways you can follow me, find me email emailing me and following me on on Twitter. And if you catch me in clubhouse, then feel free to say hi, MICHAEL: All right, Taylor, what's your pick for the week? And where can people find you online? TAYLOR: Okay, so my pick is a little technical. So I'm going to explain it. I pick generate press. And for those who don't know, Generatepress is a WordPress theme. And a WordPress theme is basically a thing that will help enhance the visuals of your site. So it basically helps make your site look the way it looks. In a short version. I mean, like a short description. So what it will do is it is really awesome, because you can customize every part of your site. And the cool part is that it's fully accessible. There are two versions free and premium. The free theme is literally just you go download it from wordpress.org theme directory, and the paid one is a paid plugin. I believe it's 59 a year or what? I can't rember the lifetime of like 249 lifetime Michael? MICHAEL: I didn't see a life. Yeah, I think it's 250 lifetime TAYLOR: Okay, so I really love Generatepress thanks to Michael Babcock and dimasi Thomas for mentioning those to me in a Clubhouse room. Where you can find me online, I'm all over the web. Literally, I have a YouTube channel that I would like you guys to check out, Taylor's Tech Talks. And that also has a podcast now. So if you like hearing from me, you can hear from me and both of those places. I also am on Twitter and clubhouse you can email me at Taylor@iAccessibility.net. And follow me on Twitter, Taylor_arndt22. And I am also producing content for iAccessibility. MICHAEL: Alright, so my pick for this week is a book series I'm reading called Expeditionary Force. And the first book in this series is called Columbus Day. The author is, I believe his name is Craig allanson. And he he has written several books in this series. And it's an awesome, awesome book series, The sci fi series about aliens taking over Earth, and about how humanity kind of steals a ship and goes out in the galaxy to kind of protect Earth. So there's an AI That's hilarious. And I'm not going to give anything more away about the series. But check it out. Highly recommend it. I'm on the third book right now. And I've been reading it for about two weeks and each books about 15 hours on Audible. So that tells you how dedicated to this series I am. So highly recommend it. As for where you can find me. You can find me producing content for iAccessibility. You can email me at mikedoise@iAccessibility.net. I'm Mike, always on Twitter, and on Facebook, just search for Michael Doise. And you go to Michaeldoise.com from my website, and I have a YouTube channel that I'm trying to make time to work on. And you know, I have content everywhere. And yeah, just very excited to be on clubhouse. I'm there as well. So find me on clubhouse. Just search for Michael Doise, and we even now, here's an announcement. We have a club. We're all fancy and everything we have the iAccessibility network club. In fact, after this recording, we will be on clubhouse doing a after episode kind of a discussion to talk about these things. So come hang out with us on clubhouse as we talk about today's episode. So we hope that you have enjoyed this episode of the IiACast. And we'll be back in two weeks for another episode. And it's been awesome getting to talk about all these things with you guys, Jason and Taylor. Want to thank everybody that's been on the stream and everybody that will listen once the episode comes out. And we will be back next time for new episodes. So until then, take care and keep playing with new technology. JASON: This show has been brought to you by the IACast Network. We love hearing from you. Email us at feedback@iaccessibility.net. Got twitter? Follow us at iaccessibility1. Facebook, search for IAccessibility. Download our free apps for IOS and Android and keep up with all of our content at iaccessibility.net. If you'd like to donate to our show, hit the payPal button on our website, and get early access to our outtakes with a donation at patrion.com/iacast. Thanks for listening

covid-19 god tv google earth apple zoom microsoft iphone smart os android mac lake ios paypal ipads windows clubhouse google play homes apple tv audible port intel echo ram apple music found ia slack wordpress u2 sd airpods pixel best buy macbook apple stores macbook pro gigs macs ipad pro cpu m1 pixels polaris a1 imac go big usb c columbus day macbook air braille tile homepod talkback airtags mac mini dolby atmos hims s5 imacs airpods max imac pro csun tech talks applecare a9 a8 homepod mini homepods imore u1 6s windows insider i9 michael oh michael it jason it michael yeah i7 jason yeah aosp jason you michael yes expeditionary force trrs michael well apple's airtags michael so space gray michael babcock michael how jason so usba jason earls generatepress findmy michael dinner jason oh michael all braillesense polaris iacast jason did

Michael Wilkinson: What Distinguishes a A Great Facilitator

Control The Room

Play Episode Listen Later Sep 15, 2020 52:18

“Whoever said, do what you love, the money will come, they got that right. Lots of work, mind you, in between. As we like to say, your passions determine your purpose. But it's your decisions that determine your destiny.” - Michael Wilkinson I’m pleased to have Michael Wilkinson here with me today for Episode 9 of the Control the Room Podcast. Michael is the CEO and Managing Director of Leadership Strategies, the largest provider of professional facilitation in the country. Michael, who grew up in the projects as what his sister described as a “Sesame Street Gangster,” eventually found himself at a New England prep school through an opportunity found through his job as a paperboy. After turning down an acceptance to Harvard Business School, Michael abandoned his 10-year plan to become undersecretary of Housing and Urban Development to begin a “faith-walk” that ultimately ended in his founding Leadership Strategies. In today’s episode, Michael and I talk about his path to the International Association of Facilitators Hall of Fame, what makes a facilitator great, and the six P’s of preparing for a meeting. Listen in to find out how Michael identifies and trains facilitators with great potential and how to ask the right questions in meetings. Show Highlights [1:38] Michael’s childhood in the projects of D.C. [5:39] Michael’s path to facilitation [10:30] What makes a great facilitator [17:17] Human connection in a virtual environment [26:07] Generating engagement when facilitating virtually [28:58] The only 3 reasons people disagree [35:16] The Six P’s of preparing for a meeting [40:56] Kumbaya facilitators [42:45] Asking the right questions [50:03] Leadership Strategies’ resources for facilitators Links | Resources Michael on LinkedIn Leadership Strategies Website About the Guest Michael Wilkinson is the CEO and Managing Director of Leadership Strategies, a leadership training and strategy consulting firm that specializes in group facilitation. He is also the author of books such as Secrets of Facilitation, Facilitating Strategy, and CLICK: The Virtual Meetings Book. In 2016, Michael was awarded a place in the International Association of Facilitators Hall of Fame. About Voltage Control Voltage Control is a facilitation agency that helps teams work better together with custom-designed meetings and workshops, both in-person and virtual. Our master facilitators offer trusted guidance and custom coaching to companies who want to transform ineffective meetings, reignite stalled projects, and cut through assumptions. Based in Austin, Voltage Control designs and leads public and private workshops that range from small meetings to large conference-style gatherings. Share An Episode of Control The Room Apple Podcasts Spotify Android Stitcher Engage Control The Room Voltage Control on the Web Contact Voltage Control Intro: Welcome to the Control the Room Podcast, a series devoted to the exploration of meeting culture and uncovering cures for the common meeting. Some meetings have tight control, and others are loose. To control the room means achieving outcomes while striking a balance between imposing and removing structure, asserting and distributing power, leaning in and leaning out, all in the service of having a truly magical meeting. Douglas: Today I'm with Michael Wilkinson. Michael is the CEO and managing director of Leadership Strategies, Inc., a leadership training and strategy consulting firm specializing in group facilitation. Michael is the author of the bestselling The Secrets of Facilitation, and most recently, Click: The Virtual Meetings Book. Welcome to the show, Michael. Michael: It is my pleasure, Douglas, and thank you for introducing me to your audience. Douglas: Absolutely. It's a pleasure to have you. And I guess, speaking of the audience, I think they'd love to hear how you got started in this amazing work of facilitation. Michael: Well, as you know, because you've been there, and many who are facilitators know, there is no front door to facilitation. It's not like you can go to college and go, “I want a degree in facilitation.” Most people enter through the back door. The major entry ways, many come through H.R. Others come through the processing-quality side. Some come through the I.T., the consulting side; from the D&I, diversity-inclusion side. I was on the I.T. side. So I was one of those kids—in fact, if you back up my story a little bit, I'm a projects kid. I grew up in the projects of D.C.. So for those who know D.C., back in the day, Anacostia, the worst neighborhood in D.C., and I have to confess, at six, I was one of those bad kids, where we’re stealing from the local grocery store. Remember the corner grocery stores that used to exist? We would—and this is really bad—we would, at six years old, we were tying kids to trees and leaving them out all night. I mean, it was before gangs were gangs. My sister called this the Sesame Street Gangsters. It was just not good. And by the time I got to seven, we moved from what I call lower-lower class—the projects of D.C.—to lower-middle class, out in what’s today is Suitland, Maryland. And at that time, and people who believe that place doesn't matter, place absolutely matters. The kids in that neighborhood, they were building clubhouses. They had a chess club. And so me and my brothers, we started doing what they started doing. Even got a paper route, if you can remember the old paper boys, where you deliver papers. Had two paper routes, making money for my family. And the change, the big change, in life came when, at 14, the Post building, the Washington Post, sponsored interviews for private schools, and any of the carriers could come for an interview. I got interviewed, got accepted to a couple of the really big private schools in New England, started going to this New England prep school. My graduating class, 50 people, 50 people in the graduating class, including—and you won't know these names unless you were into that movement—but the Wares of Long Island, Paula Ware; General Patton's grandson, the Stacks of Greenwich is—do you remember all superlatives in the yearbook, “first to make a million”? Well, we had a superlative, “already has a million,” and there were two names. These are trust-fund kids. But I had gotten pulled into that environment. And as a senior, I did a study of grades and test scores. I was a psych major at the time. So a correlation in prep school of the—and I got the grades and test scores of my graduating class. Of course, the registrar stripped off the names, but he left them in alphabetical order, Douglas, so it was too hard to find Wilkinson. And to say my test scores were lower would be true, but an understatement. I was so much lower than the next lower person, I clearly took someone's place. Talk about affirmative action, they reached out and got me. They were looking for a black kid, and I was the only black kid in my graduating class. But I graduated fifth in the class, which means it wasn't really fair that I took someone's place. But it also wasn't fair that I hadn't had the preparation that all the other kids did. So once I got it, I just excelled. Went off to a New England prep school, and I came out. I was going to be undersecretary of Housing and Urban Development. I had a 10-year plan—even back then, Douglas, I was a planner—a 10-year plan to become undersecretary of Housing and Urban Development. I was going to go back to Harvard Business School. I’d gotten accepted. I’d asked for a two-year deferment. Decided I wanted to work for two years in D.C. so I could see how Washington worked and how the different agencies worked. And somewhere along the line, got the spiritual thing. So I'm a son of a minister, so I got really clear on getting directed from the Spirit, and had that what we call the bathroom experience, the second major shift in life. So they’re actually the third. The first, of course, was moving out of the projects. The second, getting the scholarship to go to New England boarding school. The third was hearing in the shower, from out of nowhere, “Michael, if your most important relationship is your relationship with Me, how is going to Harvard Business School going to help you do that?” There you go. There's 10-year plan down the drain, Douglas. So ended up, I quit my job, I told Harvard I wasn’t coming, and went on a six-month faith walk, where just—and things are great when you do a faith walk, Douglas, where these things are great 29 days out of the month. It's when that rent is due, that’s when things get really hairy. But it was one of the most important times of my life and learned some really important lessons. And the most important one, because I was asking, “Okay, God, you don't want me to do this 10-year plan. It was clearly my plan. Well, what do You want me to do? You want me to become a minister? You want me to go off on a mountain and contemplate my navel. Do You want me to stand on the corner and say, ‘Have you asked, talked about, thought about God today?’” And I got that direction, and a really important direction, that each of us is called to ministry. Ministry is service. That's what it's called for. Some people, it takes the form of the pulpit. For other people, it takes another form. Facilitation is my ministry. I ended up facilitating, 1985 is my first official facilitated session, in a session where we were doing requirements analysis, and it was going south. Vendor was presenting, just going all over the place. I was the youngest kid in the room. We have, you know, the consultants. I was with Ernst and Young, the youngest consultant on the team, but nobody was stepping up. So I just got up and said, “You know what, let’s structure this a little differently.” And so here with the client people, with our own consultants, and with this vendor, restructured the conversation and led it for that three hours going forward. Afterwards, someone said, “That was a great facilitated session.” Douglas, I was like, “What? What are you talking about? What's this thing called…” I had no idea. And then when they explained it to me, I said, “Oh, yeah. It's easy. Everybody is good at it.” And that's where I learned everybody was not good at this thing called facilitation that I had been gifted with some natural talents that made me instinctively good at it. And so I started doing it, started facilitating for my church, started facilitating for the nonprofit associations I was a part of. And then the fourth major shift in life came. This is the call that actually changed my trajectory again. Connie Bergeron—I remember. It was March 1991. She called and said, “Hey, we're looking for a facilitator. I've just been named head of Meeting Professionals International for the Atlanta chapter. I'm getting my officers together for a retreat. It's going to be on this particular weekend. Would you facilitate it for me?” I looked over my calendar, Douglas, and said, “Sure. I'd be glad to.” And, again, she said the words that changed my life, “And we’ll pay you.” Really? I mean, I was willing to do it for free because it’s fun. So she paid me. It was great. Two months later she called me back. Mentioned the pay word again. Three months later called me back. It was November of 1992, 1992, yes. I was, at that point, 18 months from becoming a partner at Ernst and Young. I turned to them, Douglas, and said, “I'm having way more fun on the weekends than I'm having during the week,” and left and started Leadership Strategies, the facilitation company. Do you like to say world headquarters, our second bedroom, which is great. Big plans, but just getting started. And it has been an amazing blessing. Today, we're the largest provider of professional facilitation across the country. We have 600 facilitators under contract. We have a core team of 27 facilitators. We've trained 28,000 people in facilitation skills; written six books on facilitation, the two you mentioned and four others. It is crazy. Here's this kid from the projects, and it's been just amazing blessing. Whoever said, do what you love, the money will come, they got that right. Lots of work, mind you, in between. As we like to say, your passions determine your purpose. But it's your decisions that determine your destiny. And so it was just a bunch of decisions that helped me along the way. And it's been just a tremendous blessing. Anyway, long story, but thought your listeners might enjoy understanding, how did I get here? because it's been a crazy, crazy ride. Douglas: Yeah. I mean, wow, impressive. And, you know, I think most facilitators can relate to this kind of moment of—well, kind of two moments that you described—the moment where you start to—these kind of natural talents start to click. You know, for me, it was always, I always found myself in meetings where people were disagreeing, but really they were saying the same thing but just in different ways, or they thought they were agreeing but they were saying different things. And I always had to interject and say, “Hold on for a second. I think you're saying this and you’re saying this,” and they're both nodding their heads. And then they stop for a second and realize that they were saying different things. And that happened enough and enough and enough that I realized that, man, that's something that I'm not seeing enough out of other people. And so I think that's something that's a hallmark of a facilitator, when you realize that in meetings, there's something about what you're observing or the way things are unfolding that really align with this ability to help move things forward in a natural and productive way. So I think— Michael: You really have touched on something that’s really important, and many facilitators may know it or not know it. When we were doing training early on, I was recognizing that there were people who were learning the techniques but missing some things that were going to make them a great facilitator, even though they knew all the same stuff that others knew or that we were training other people in. And I realized, and you put it well, that we talk about now seven key characteristics to look for. And people ask us, “Hey, we've purchased your training class. We're going to have a training for 16 people. How do I choose the 16 people in the class?” And we tell them, “Here's some target characteristics to look for.” We talk about seven, and we tell them, “Really it's three that's really important. And oh, by the way, the first two we can do nothing about.” So those three, just quickly, one is you got to like people, right? If you don’t like people, this is not something you should be doing, because people give you lots of reasons not to like them. So you really have to have a starting point, where you really like people. Two, you have to be able to process information quickly because there's so much coming and your mind has to be listening and processing at the same time and being able to differentiate, yeah, this is the same as that. This is different from this. This is…while you're listening, being able to process that. And if you can't process quickly, really, all you're going to be is a meeting manager. And great facilitators are way more than meeting managers because they're able to capture the spirit of a group; help engage them; and help guide them; can see down the road and around the corner, see the car or the truck that's coming that they're about to crash into, long before they're getting there, because they're processing while stuff is going on. So clearly, you have this skill, and then could recognize, a lot of people don’t, “Well done, sir. Applauding you. Well done.” Douglas: Well, yeah. You know, it's funny. I don't know how many times you've been speaking with someone that's maybe interested in learning facilitation or even a prospect or whatnot, and it turns out they're conflating facilitator and moderator. And I think that's maybe the big—and I think when you say meeting manager, it's all in that same bucket of, like, not facilitator. Michael: Yes. And it really, I mean, it really is because there are some people, people who are great speakers, think, “Okay, I'd be a good facilitator.” People who are great trainers, “Wow. I could be a good facilitator.” And we say, okay, let's separate this, because, as you know, facilitation has got convoluted with a bunch of stuff. So ATD, the Association for Talent Development, uses the name facilitator for trainers. And that's fine. Training facilitators, that's good. We can infer very much. But we are more group facilitators. In our business, it’s kind of interesting because what we find is in general, this isn’t completely true, but in general, our best trainers are extroverts. Our best group facilitators are introverts. One of my people who worked for us many years, she said something to me one day, and it's like, this capsulizes it well. She said, “You know, Michael, I like facilitating, but I really love training.” I said, “Okay, Leslie, I'll bite. Why do you really love training?” She said, “Well, when you're facilitating, you really have to listen to them.” And there you go. Ding, ding, ding, ding, ding. You get where I get that? Really rings the bell of why introverts, who are, really, they value listening and processing a lot more than extroverts, who generally like expressing. And so if you generally like expressing, you may find that training is way more your passion than facilitating, where you're really listening, contemplating, and helping a group move in a direction and so on. Interesting, yes? Douglas: Yes. And, you know, I can find that really fascinating because usually we like to pair up someone who’s kind of a classical trainer— Michael: Yes. Douglas: —and has that air, that performance aspect with a facilitator in these training sessions, because then that person can put on the dog-and-pony show while the facilitator is making sure that learning's integrated, because if you're not listening and working with them, you don't know if it stuck. Michael: And so what's interesting, I’m going to take you a step further, and I'm really biased here, that I really think we figured out in our company or we'll wait to think about how to make training work, because we don't hire trainers to train people in facilitation. We hire facilitators to train people in facilitation because they understand and role model all the techniques. But then we teach them about how important it is, with one of our eight principles in our facilitation course, all has to do with energy and keeping the energy high because that's one of the hallmarks of our practice. So we have to be able to, we call it show time. As an introvert, I get my energy from within, and people often are surprised when they see me do my thing, and then at the end of it, it’s like I’m the thumb in the mouth. I need a blankie. It happened twice before I realized this was a bad idea, Douglas. Clients who, when I was about, I was going to facilitate a two-day training session. Let’s say it started on a Tuesday. The client said, “Hey. Why don’t you fly in Monday night, meet with the team, they’ll get to know you, and then we’ll get started Tuesday morning?” Douglas, I did that twice. I’d never do that again, never, ever, ever, because what happens is, because I'm a natural introvert, when they meet me Monday night, the side conversations. “This is our facilitator? Really?” because— Douglas: We got a meeting with this guy all day? Michael: —I’m quiet. I’m just, that’s who I am. But once I—I'm glad we meet with them Tuesday night, because after that, they've already seen me. And now they're asking me the questions, not looking for me to entertain them, because I'm not an extrovert. I’m an introvert. So very different. So it's what we do in order to make it work. Douglas: Well, and nowadays we're in the midst of a pandemic. So all the team dinners are a thing of the past. Michael: Well, actually, actually, think about it. It really is. We still need—the social engagement is central. And so we as facilitators have to recognize, how do we make that happen, even in a virtual environment? And so we do that. So we may have this session from eight to five, and then we have a virtual cocktail hour for everyone. We break for 30 minutes, everyone grabs their favorite drinks, and we have a virtual cocktail hour for 30 minutes, an hour, as we would if it was a real session. But it's an important piece, so we can't miss it. That's for sure. Douglas: Yeah. And the human connection is so, so critical. Michael: How are you all doing it in your business? How are you keeping the human connection going during this? Douglas: Man, you know, I think it's always been a part of the design. And I think as long as it's a focus as a guiding principle, when you're designing an agenda for a session, it'll find its way in. I think it's important to start there first, right? Michael: Oh, it always helps. Douglas: Yeah, yeah. And I love this notion of the cocktail hour. Everyone has demanding schedules in this virtual space, right? And so they might have kids to run off to— Michael: Absolutely. Douglas: —or they’ve slotted it in. And it's a lot different than, you know, having taken the effort to drive somewhere and like, “Okay, I’m here. Maybe I’ll just stick around for a little bit longer.” We always just make it clear that, okay, the plenary is done; we're going to be around a little bit longer because I know some people like to stick around. Because I like to refer to it as, you know whenever you're cleaning up the supplies, people stick around and ask you questions? Michael: Yes, yes, yes, yes. Douglas: In virtual, there are no supplies. You can just shut MURAL and Miro or whatever off, and we’re done. Michael: We’re done. Bye. Douglas: So I like to tell people, “All right. Well, now we're cleaning up, and we'll be around for a little bit longer. If you want to ask any questions, we'll be here. But don't feel like you have to stay if you have places to be.” Michael: That’s a great idea. Douglas, I’m writing that down. “Hey, we’re going to have a clean up or stick-around time for those who…” I like that. You’ll see a blog about that soon. I like that. Courtesy of Douglas. Douglas: I love the cocktail-hour notion, too. It's like, I'm just making sure we reserve that time for people. In fact, it was BBC released a report, and the headline was quite hilarious. It was like, “Research Finds That Most Meetings Are a Form of Therapy,” or “Most Meaningless Meetings Are a Form of Therapy.” And the point was, and you hear that and you're like, “Well, that seems kind of crazy,” but it's kind of interesting because it's like people gravitate toward having these meaningless meetings, these meetings that nothing comes out of them because they have this need to have connection. And so if you think about it, if we get really intentional about our connection during meetings and plan them in, then people don't have to plan these extraneous things that then waste time. Michael: Well done. Well done. And we think that the pandemic has changed a lot of things. Unfortunately, one thing it hasn't changed is poor meetings. In fact, they've gotten poorer in the sense that with this virtual thing that people actually think that, well, because it's a virtual meeting, it takes less preparation or because it's—and we are finding, just as in our training work, we've converted virtual sessions where maybe 5 percent, 4 percent of our business prior to the pandemic, now it’s 95 percent. And our facilitators are finding it’s way more work, whether it’s a virtual meeting or virtual training, way more work to prepare for it. Way more. And the key is, we call it the virtual details, that where before you would have, okay, let's say we have a process-improvement session. And so we're going to start with (a) introduction; then section (b) we're going to talk about how does that process work today? Let's say we're trying to fix the hiring process in the company; (c) we're going to talk about the problems and causes; (d) we're going to brainstorm potential solutions; (e) we're going to reformat the process; (f) we're going to put together implementation plan; and so on. Well, that's what we'd do if it was face to face. We'd go, okay, (b) here's what I'm going to do with the flip charts. I'm going to set them up. And we know instinctively to do that. Virtual, whole different world. We say with each of those agenda items, do what you normally would do. But you also have to figure out the virtual details. So (b) you know what, I'm going to do a poll; action (c) I'm going to use the whiteboard; action (d) I'll do annotations; (e) I'm going to use a breakout group with…and then we… So we teach a course now called the Zoom Plus. And what that is, is everyone is now using Zoom, and you know wow. All those people, Zoom meetings, they're not even using all the basic Zoom stuff. Annotation, whiteboard, breakout groups, and so on. So we show them. And we like to say, “We are going to play with the technique so that you do it. You’ll play with them. Then, we're going to take the camera and put it behind the facilitator so that you can see how the facilitator creates the polls, how the facilitator creates the breakout rooms, and then you're going to do it.” So that’s using the basic stuff. And then, Zoom Plus, the plus part of that is we then show them what our facilitators do. And these are 15 virtual-engagement strategies, things like rotating flip charts. How do you use—how do you have the groups rotate through? Last person standing, dump and clump, and all these other advanced engagement strategies, using them, doing them, and doing them virtually. All cool stuff. So we first tried to get them using the basics, which most people aren't using. And then we're showing them, here’s how you use the advanced strategies that will make your meetings absolutely stand out. And people, as we like to say, you know you've gotten there when you hear people go, wow, that was the best virtual meeting I ever attended. And unfortunately, as you can imagine, Douglas, it's easy to be the best, because most are so poor and boring. Douglas: The bar is so low. So low. Michael: It is. Exactly. You’ve had the experience. Douglas: So. Yeah. And, you know, I think there's so much—early on, folks were asking, “Oh, do we get a discount for virtual?” And I’m like, “Man, I’m thinking about charging a premium,” because it's not only the prep time, but, you know, having an assistant facilitator is so much more critical because someone has to manage the tech. Michael: Absolutely. And what we're finding is frequently—I would put it in the 20 percent time—the facilitator has an issue. So as an example, one of our rules is for client sessions, client sessions, you never underscore underscore. Use your microphone on the computer. You always call in over the phone. The reason is if something happens to one of the two, you still have the other. So for some reason, you lose Internet connection, you can still talk to them. Or some reason the audio goes out, you can convert to what's happening. So you actually want to have redundant backup. We often suggest that you have another computer connected. So you have two sessions going, one is the participant computer. So if something happens, you can transfer over quickly to make it seamless. So it's almost like you run out of flip-chart paper. You run out of flip-chart paper, you always have a spare right there. Well, how do you do that virtually? Douglas: Planning on the redundant systems, having the activity by activity, having what is the virtual equivalent of all of this? Have I taken the time to proof it and make sure it's good? I mean, that is a lot of extra work, and not to mention just the fatigue of these environments. And, you know, I recently spoke with someone. They were telling me that—I'm not sure where the research came from, so this is all anecdotal—but they were saying that any time we're typically working in a three foot kind of context, it's typically a fight or a mating scenario. Michael: Wow. Douglas: Because you don't get three feet in someone's face inside the meeting room. That would be awkward. But now we’re doing that with these computers and is very sometimes mostly charged, political, like, we're talking about some really intense stuff. And we go in, and we try to—one mistake we made early on was, let's have an eight-hour session virtually. And, you know, you can't do that virtually. Michael: Yeah, it’s much harder. Douglas: You have to do it much shorter. And so I think there's some training of setting expectations for clients, too— Michael: Absolutely. Douglas: —even ones we've worked with in the past. Michael: Yeah, yeah. And so I'm going to go a step further, because this will be—because you are correct that the virtual sessions, by their nature, the dynamic is very different. And I want to—everyone knows—not everyone knows—many are aware, and it comes out in our polls, when we ask people, what is the biggest challenge in virtual meetings? And we've asked this to thousands of people now through our webinars and so on. It always comes up with the same thing, and it's not even close. It's engagement, keeping people engaged, because people are multitasking, doing other things. And so as facilitators, that's got to be our number one focus. How do we keep people engaged? And here is something that we ask people to consider. We as a company, we do have, we have what we call the PDI Difference—Practical, Dynamic, Interactive. And the way we do that in face-to-face sessions is we ensure that if we're training people or having a facilitated session, there will be significant engagement every 20 to 30 minutes. Thirty minutes will not go by without significant engagement, and mostly 20 minutes. So somewhere between 20 and 30 minutes. Douglas, when you go virtual, cut that bad boy in half. You’ve got to have significant engagement every 10 to 15 minutes. So if you’re getting people together, if you are going 90 minutes between breaks, do the math. Even if you say, “Well, the beginning, there's obviously engagement. People are going.” And the end of that 90 minutes you have engagement, so that means you've got to have at least four others, at least four other engagements. And if all you know is the classic engagement question-answer, question-answer, man, that meetings will wear people out. That's why it's so important for people to have all these other engagement strategies—dump and clump, last man standing, rotating flip charts, all this other stuff, to help put in people's toolbox. And so really important for facilitators to recognize that it takes a lot more if it's virtual. And as you said, training our clients that, “Listen, you know, normally I would charge a day of prep for this, but it's virtual. And so therefore,…” Yeah. And making it clear it's extra. Douglas: Absolutely. Let's talk a little bit about the Secrets of Facilitation. Michael: Oh, my favorite book. Yes. Douglas: You have over 60 secrets in that book. Michael: It is. And really good stuff, I think, personally. Douglas: Yeah. I'm a fan. I have it on the bookshelf behind me. And, you know, beyond the basics, things like preparing and managing for dysfunction, what do you think the biggest secret that most people don't know? Like, what's the one that you’re just like time and time again does no one just…? Michael: There are a couple that come to mind, but let me focus on this one. And I'm about to make a statement, Douglas, that when I say it in our training classes—I mentioned we trained over 20,000 people—there are always people who go, “No, that can't be right.” And by the end of the teaching, they go, “Yeah, that's really true.” Here is the statement: there are only three reasons people disagree. Huge secret. There are only three. Every disagreement in the entire freakin’ world, there are only three reasons people disagree. Only three. Now, that's the good news, and that's really good news. But here's the bad news, and it's really bad news. If you have a level-three disagreement and you try to solve it with level-one techniques, you're going to fail. Level-three disagreements can't be solved with level-one techniques. Likewise, you have a level-one disagreement, try to solve it with level-two techniques, you are going to fail. Can't happen. So we as facilitators have to understand the three reasons people disagree. Have to be able to diagnose which reason it is and have strategies for addressing each one. Now, while that's a teaser, I probably should take a minute to say what are those three reasons people disagree. So let's break it down really quickly. So you probably have figured out one, two, or three of them. You want to take any guesses, Douglas, or you want me to reveal? Your shot. Douglas: Why don't you—well, you do the reveal. You do the reveal. Michael: Okay, I’ll do the reveal. So number one, and it's most disagreements, level-one disagreements, and you actually implied it when you were talking about learning that you were a great facilitator. That is, people disagree because of information. One has information that the other doesn’t have, and they’re arguing, bumping heads, even though once they realize and the information is put on the table, they'll realize they weren’t in disagreement at all. Level-one disagreements always end the same way. “Oh, is that what you meant?” There you go. And as we like to say, when you hear those words, your job is done, because they really weren't in disagreement. In fact, the book Crucial Conversations highlights that, they give it a name, violent agreement. They really are in agreement, but they were arguing. They were just using different words or one had information that the other didn't have. So you saw level-one disagreements, pretty simple. We as facilitators have to understand the difference between advocacy and inquiry. If you ever watched two people arguing, it's like they're fighting back and forth. Statement, statement, statement, statement. Each person is trying to advocate for theirs. If one of them would just step back and just ask the question, “Well, why do you say that? What do you mean by that?” they’ll then would clarify, and you would hear those words, “Oh, is that what you meant?” There you go. Resolved. So we have to move people from advocacy mode to inquiry mode, and you do that yourself by asking questions. In a business environment, there are specific questions we train facilitators to ask, because most level-one disagreements or business are based on either cost, time, who’s involved, or how it’s going to happen. And so we get the questions. Level-two disagreements are different. If the level-one disagreements are about information—again, we find most disagreements are level one—level-two disagreements are about values or experiences, that they have different values or had had different experiences that prefer one alternative over the other. They understand each other perfectly. They just value different things. Well, you can solve a value disagreement simply by identifying and isolating the key values. What are the key values that each person has? And then creating solutions, brainstorming solutions, that combine those values. It's not a compromise activity. It is a creativity activity, where, as we teach it, you can come up with some pretty novel solutions once you isolate those key values. It just works. In fact, we get more letters about that technique than any others because it really does work when you understand what you're looking to do. Level-three disagreement is different. It's not about information. It's not about values or experiences. It's about personality, past history with one another, or some outside factor that has nothing to do with the disagreement. It's not about the disagreement. They basically don't like each other. Can you solve a level-one disagreement by asking questions about the issue? No, because it's not about the issue. Can you solve a level-three disagreement by asking about the values? It’s not—yeah, you solve level-three disagreements differently. Take it to a higher source. You're not going to solve it at this level. You've got to take it up the chain. And so we talk about strategies for doing that. But most facilitators, that secret of understanding there are only three reasons people disagree, and so when you're listening to a disagreement, we train people to say, “Hey, next time you're listening to a disagreement, just say under your breath, ‘level two. Yeah, level one. Yeah, level three,’ so that you can get used to diagnosing what type of disagreement it is so that you keep that mindset of, okay, here's the technique I want to use to adjust this disagreement. So it's cool stuff and really one of those fun secrets out of the 60. Douglas: Yeah. I love frameworks like that, that can—are very actionable and we can kind of lean on them in the moment pretty easily. Michael: Well, you know, I find that the best facilitators are process oriented, Douglas. And I'm just going to give your listeners a heads up. If you were to see the prep work that Douglas had sent out to my office around the thinking that they've already done around how to have a great podcast, it was like, oh, my gosh, this is like a cookbook. All I have to do is this part. They're doing all these other pieces. And some great process thinking, very much appreciate it, because it makes it easy. In the same way, if you can give facilitators a process to use that's been tested, proven, that they can modify and make theirs, it makes all the difference. And that's one of the things I think we're good at: giving people processes. Douglas: Absolutely. If you could change one thing about meetings in general, what would it be? Michael: Oh, my gosh. Wow. You're asking big questions here. If I could change one thing about meetings. Yeah, I guess—yeah, that would have to be it. Douglas, the biggest challenge I find, and we find over and over again with meetings that other people are leading, is preparation. So few people do the preparation necessary. And quite frankly, it's not a lot of work if, as you would say, there's a framework for it. And so I'll just give your listeners a framework. We call it the six Ps. And it doesn't matter whether you are running a meeting for yourself or running a meeting for someone else, ask the six Ps, because once you know the six Ps, you execute on that and you can be really prepared. One, and you know it all starts with purpose. Douglas: Yes. Thank you. Michael: Why are we having this meeting? Douglas: Yes. Michael: Why are we having this meeting? What's the real purpose of the meeting? And then we say, “Okay, now that we're clear…” And so I'll give an example just to make it real for your listeners. Someone may come to us. “Michael, Michael, I’d love to have a team-building session for my team.” First P, purpose. “Really? Help me understand what's really the purpose of the team-building session?” “Well, I need my team working together better because, you know, we kind of snipe at each other sometimes. So I really want us to have a strong, bonding experience so that we can walk out of that room, moving together, working together, feeling better about each other.” “That's helpful.” Second P, product. “So what is the product you want to come out of that meeting?” “Michael, what do you mean?” “Well, think about it this way, in terms of the three Hs. When this meeting’s over, what do you want your team to have in their hands that they can see?” “Well, Michael, it’d be great if we had a team vision.” “Cool. Anything else?” “Well, maybe some team norms.” “Okay. Anything else?” “Well, maybe if we could walk away with what's going to happen if someone violates the norm, so we have that kind of…” “Anything else?” “No, I think that's pretty good.” “All right. Well, thank you. Well, let me ask you this. What do you want them to have in their head when the session is over?” “Michael, what do you mean?” “Well, what do you want them to know that they didn't know before the meeting started?” “Well, maybe I want them to know, hey, what makes a team great? What are the qualities of a great team and know how we assess against that, and what are the things we need to work on to be a great team?” “Cool, cool, great. So what do you want them to have in their hearts when the session is over?” “Michael, you getting soft on me?” “No, no, no. What do you want them to believe that maybe they didn't believe before this session was held?” “Well, I want them to believe that if we do these things, we’ll be a great team. I want them to feel committed to making it happen.” “There you go. Great. Well, so you’ve talked about purpose and product. Let me ask you this. Tell me about the people who are going to be in the room. Who needs to be in the room that we create these products and achieve this purpose?” “Well, I want my whole team there.” “Anyone else?” “Well, you know, do you think, Michael, my E.A., should be there?” “Well, let me ask you, do you think your E.A. is part of the team, work with the team? Is your E.A. part of getting things to happen?” “So, yeah, that's great.” “Anyone else? There we go.” “All right. Well, we talked about purpose, product, participants. Let me ask you this. What are the probable issues that we need to address? What are the things that we absolutely need to talk about if these participants are going to create these products to achieve this purpose?” “Yeah. We've had a couple of things happen over the last few months that we really need to talk about.” “Well, let's talk about what those are. Anything else we need to talk about? Great.” “Well, now let's talk about process. What's the process you're thinking we might want to take the team through so that we address these issues so the participants create the product and the purpose? Great.” And notice, by the way, Douglas, process is fifth. Many people think, “I want to hold a meeting. What's the agenda?” Wrong answer. There’re four questions you have to answer first—purpose, product, participants, probable issues—before you get to process. Never start with agenda. And then the six P is place, meaning—and it's all the stuff around the place. And in these days, the place is virtual. So let's talk about all the things around the virtual platform that needs to be. So we say when you have those six questions answered, the six Ps of preparation, you're now ready to do the work to get well prepared for your session. So we think that's a great way to address and make meetings so much better. Just most people don't do the work. They don't think about the six Ps. Douglas: Yeah, you know, there’re so many meeting—you talked about the lack of preparation, and it’s like— Michael: Yeah. Douglas: And so there's this weird spectrum, because on one end, no one's doing anything. So they're just kind of walking in blind, and they just threw something on your calendar called a meeting, and they're not even—so there's a lexicon and taxonomy problem. Michael: Yes. Douglas: And so that's a whole other thing we could get into. But then on the other hand, when they do the planning, their agenda’s just a list of topics— Michael: Yes. Douglas: —and it’s not thoughtful, it’s not informed by— Michael: Absolutely. Douglas: —the purpose. We were just talking earlier today about the problem with icebreakers and warmups, in that— Michael: Oh, my gosh, yes. Douglas: —people just throw them on the agenda, without thinking about the purpose and why they’re there. And I love this. I have this saying that if you can’t ask your participants after doing something like that, “Why did we just do that?” and have it erupt into a pithy conversation, you need to ask yourself, “Why did we just do that?” Michael: Oh, well said, Douglas. Well said. In fact, our company, in general, when it comes to icebreakers, we hate them because most icebreakers are just stuff. And we say, “It's good to break the ice,” but you want to break the ice with an activity that furthers the purpose and product of the session. If you say, “Hey, you know what, we’d like to spend a few minutes talking about your favorite vacation spot,” that's a great icebreaker if the purpose of our session is to choose a vacation spot. If it's not, leave that icebreaker at home. “Hey, you know what, we'd like to hear about your most embarrassing moment.” That is a great icebreaker if this session is about dealing with embarrassing moments. If it's not, leave that icebreaker at home. Whatever you use as an icebreaker, it should further the session result, not be something, as you said, that’s unpurposeful and inserted into the meeting. Facilitators have a bad rap of, “Hey, we help people hold hands and sing Kumbaya.” Read that from an executive standpoint, “We're great at wasting people's time.” That's how executives view the classic Kumbaya facilitators. Our job is to make sure every moment we spend with executives is productive. It's used to get to a result that they are willing to invest in. If they're not willing to invest, we have just added non-value activity. So non-value added activity is not helpful in a facilitated session. Douglas: Well said, my friend. So I would love to leave our listeners with one last piece of advice. And so if you could ensure every facilitator in the world had one skill, what would it be? Michael: That's easy. That's really easy. When you think about facilitators, when we walk into a room, our most important job is to pull out the most important information that's going to help this group get where they're going. That's our responsibility. To do that, we don't have to be good at asking questions. We have to be great at asking questions. We have to be really excellent at using questions to pull out the information that's going to help the group. As I said in one of my early, early ad set we put together, the ad said, “Hidden inside of your company are answers to some of the most important issues facing your organization. Your people have the answers. We bring the questions.” And so we teach something called the secret of the starting question. If you’ve ever facilitated a session and you asked this really great question and got complete and utter silence, if that’s ever happened to you, what we teach is, more times than not, the reason you got silence is that you asked what we call the “type A” question instead of a “type B” question. Type A questions lead people to silence. Type B questions get people putting up their hands, jumping up and down, trying to get you to respond to them. Or you're old enough to remember Welcome Back, Kotter. We called it the Horshack effect. “Ooh, ooh, ooh, Mr. Kotter. Mr. Kotter, call on me.” And that's what we want to get. And so, how do you get that? Well, it’s all in how you ask the question. And we call it the secret of the starting question. Now, just to give an example. Let’s go back to my hiring process. If we're in a room and we got a bunch of people, we're trying to figure out how the hiring process works today, that's one of the first agenda items. As a facilitator, we go, “Okay, great. We're all together. We're ready to get to that first agenda item. Let's get started. How does the hiring process work today?” Crickets. “Come on, folks. You know how it works. How does it work today? What are the steps?” Crickets. “Come on, guys. You know the…” There you go. Instead, you would ask what we call a type B question, and it sounds like this. “You know, we're ready to get started with documenting the current hiring process. I'd love for you to think about the last time you hired someone. Think about all the steps you had to go through, all the people you had to talk with, the forms or whatever you had to fill out to get that person on board. What are the steps in the current hiring process?” We call that a type B question. How is it formed? They're three steps. It's pretty easy. It's pretty simple, just not easy. Its first step is you start with an image-building phrase. “Think about the last time…,” or “If you were about to...” or “Imagine…” It doesn’t start with “What…” Here comes a type B question. You're going very direct. Or “Why…” or “How…” or so on. It starts with an image-building phrase because you're trying to create an image, because when people can see their answers, they answer right away. Then, you expand the image with at least two other phrases. Then, you ask the direct question. “Think about the last time you hired someone. Think about all the steps you had to go through, all the people you had to talk with,” and so on. Because when people can see their answers, they raise their hand. When people can’t see their answers, if you ask, “What are the steps in the current hiring process?” they're going to go, “Hm, let me think.” What are they doing? They're trying to imagine their answers. Why? Because you didn’t ask a question that helped them do it. Facilitation means to make easy. We've got to get them visualizing their answers. So that's just one of the things. We teach nine different questioning techniques. And if we could do that for every facilitator in the world—in fact, your audience have probably heard of TED Talks. If they were to go to the TED site and type in “secret of the starting question,” they would see me giving a TEDx Talk to the International Association of Facilitators on the secret of the starting question. Douglas: I love it. So good. It's funny, once you were starting to talk about the secret to—or the one thing that facilitators should know, and you started talking about questions, I was going to ask you, what is one of your favorite questions? But then, before I even had the opportunity, you gave us a framework for asking questions. So I'm still going to throw this at you for extra credit. Is there a question…? In fact, you threw out one of my favorites already, and that is, what did you mean by that? I think that's such a disarming question, especially if someone says something that is maybe judgmental or offensive in some way, and maybe there was no intention behind it, and we want to just give them an opportunity to unravel that or explain it. Michael: And it helps them do it. And that’s a great one. And I think one of the things you find is why questions and how questions are often challenging for people. And so you want to be careful, as we say, you want to focus on the tone. And probably my favorite, it's simple, is, “Help me understand, why is that important? Help me understand, why is it important?” because your tone could be, “So why is that important?” That’s a wrong tone. No, thank you. Yeah. So tone as you ask that question, “Why is that important?” is one of my favorite questions. There have to be questions because it gets to, oh, new understanding, because I'm thinking, perhaps if you could see my thought bubble, “What does that have to do with anything we're talking about?” And so sort of just, “Hey, help me understand, why is that important?” Douglas: Also, “Help me understand,” I'm taking the blame for not understanding it, which is great. It reminds me, too—I've been listening to a lot of masterclass. And Chris Voss has a really great masterclass, and he's a master negotiator— Michael: Oh, excellent. Douglas: —and author of that book, Never Split the Difference. And one of his points around not using why, he never asks any why questions when he's negotiating with a hostage. And it's because, remember when you were a little kid and something you broke, something by accident, and your parents were like, “Why did you do that?” So it's just like, it brings you back to those moments. So we don't want to psychologically hijack anyone when we're asking these questions that we don't really have much intent behind. Michael: There you go. Really important stuff. Questions are a key for facilitators. Really getting down a question framework for yourself, really good stuff. Douglas: Absolutely. And I encourage people to check out the type B questions and all the other great stuff, the six Ps, et cetera. It's really awesome stuff. And so if they were going to dig deeper into this, how can they find you? How can they unravel the secrets more deeply? Michael: Well, please, our website, www.leadstrat—that’s short for Leadership Strategies—leadstrat.com, and any of the resource pages. You can also, in our store, we have all the books—The Secrets of Facilitation is probably the one we’ve talked about the most, as well as Click: The Virtual Meetings Book. Those two are ones that in this pandemic people will find most helpful. And again, do check out— Oh, our gift to the industry, we recognize that as part of our—we’re the largest facilitation company in the country, that what we do, we typically do three or four free webinars a month. Most recently, we've been doing them on the virtual side of things, running effective virtual meetings, making Zoom hum, those kinds of things, just, really, free webinars. Of course, we do it because we know that once people get a taste of what we do, they may want to learn more. We’ve been doing them for over a decade now, these webinars. But please check them out. And you know what most webinars, Douglas, are thinly veiled sales pitches. For us, we go, “Okay. Please give us 60 minutes. You're going to get 55 minutes of real content, stuff you can use tomorrow. Then, the last five minutes we’ll talk about for those who want to learn more.” So really hardcore, hit-it content. And so it's really great. They get 400 or 500 people on every webinar, and so it's really fun stuff. Douglas: Excellent. Well, I can't wait to check one out. And, you know, it's been a pleasure to have you on the show today. Michael: Oh, likewise, being with you. It’s just been a fun conversation. Douglas: Absolutely. Well, thanks again, and we’ll be talking to you soon. Michael: All right. You take care. Outro: Thanks for joining me for another episode of Control the Room. Don't forget to subscribe to receive updates when new episodes are released. If you want more, head over to our blog, where I post weekly articles and resources about working better together

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第965期:Travel Tips For Portugal

Play Episode Listen Later Sep 6, 2020 3:16

更多英语知识，请关注微信公众号: VOA英语每日一听 Michael: So Ana, you're from Portugal, right?Ana: Yeah, right.Michael: Okay, because I'm actually thinking of going to visit Europe this summer, and I thought Portugal would be a great place to visit.Ana: Oh yeah, Portugal is great especially in the summer. It will be really warm and you can go to lots of places in Portugal. You can go to the North where we have a lot of mountains and you can do all kinds of activities like archery and horse riding.Michael: Oh wow, that's interesting. Well, actually, I was thinking of going to the beach. Can you give me some advice for what's the best time of year to go. And perhaps there are not too many tourists are on.Ana: Oh yeah, if you want to avoid tourists, you should definitely not come in August. August is really crowded and there are just so many people in the South of Portugal. You can try to come in June.Michael: All right.Ana: June is already warm but there are not too many people. So it will be easier for you to find accommodation. There are some really nice hotels and hostels around. So what kind of place were you thinking of staying in?Michael: Well, actually, I don't really mind too much. I think I'd like to see what it's like for normal people in Portugal, what it would be like to go on a holiday and have an authentic Portuguese experience. So maybe – I don't really want to stay in a big international hotel. What's a typical Portuguese place to stay and is nice for a summer holiday?Ana: That's interesting, yeah. In that case, you should definitely avoid the big hotels or any hostels. There are some apartments that you can rent. So you can just live in an apartment by the beach.Michael: All right.Ana: Yeah, they're just in a normal building with other Portuguese people but you can rent it and stay there and it's really close to the beach. It's like a one-minute walk. So it will be really convenient for you.Michael: And this is by the Atlantic Ocean.Ana: Yes. Yes, it is.Michael: All right. That sounds like a very good idea staying at an apartment. How much should I budget for that?Ana: Hmm, I am not really sure. It will probably be a bit more expensive than a hotel.Michael: Really?Ana: Not in the long term. You can pay about EUR 30 per night, I think.Michael: Well, that's huge.Ana: For a nice location, yeah. If you come with friends though, you can also rent a villa. We have some villas also by the beach.Michael: Does it have a swimming pool?Ana: It does have a swimming pool. And they have plenty of room. So if you want to come with a big group, that's definitely a better option.Michael: That sounds like a great idea. I can invite my colleagues along. So do you have any final tips for me, for my holiday in Portugal?Ana: Well, I mean, if you want to stay in the South, in the Algarve, then I definitely recommend you check out the nightlife. I can be really lively in there in night markets where you can buy lots of souvenirs and people just hang around. So I definitely recommend that.Michael: Okay, and what was the name again? The Algarve?Ana: The Algarve, yeah. That's the southern part of Portugal, so you can't miss it.Michael: Oh, I got to remember that. Thank you very much.

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第965期:Travel Tips For Portugal

Play Episode Listen Later Sep 6, 2020 3:16

europe south north portugal portuguese atlantic ocean travel tips eur algarve michael oh michael well michael okay michael all

第964期:Life in Portugal

Play Episode Listen Later Sep 5, 2020 2:25

更多英语知识，请关注微信公众号: VOA英语每日一听 Michael: So Ana, you're from Portugal. Can you tell me a little bit about your country?Ana: Yes, sure. Portugal is a really small country actually. It's right by Spain in Europe and we have really nice weather there. It's really sunny most of the year and really hot in summer. It can get really cold and really rainy in winter. But yeah, overall, it's a really nice country to live in.Michael: And I've heard you have nice beaches in Portugal.Ana: Yes, we do. I used to go to the beach everyday with my family in summer. It was really great. But the beaches can get really crowded. Lots of people, so you might want to be a bit careful when you choose where to go.Michael: All right, I see. And where do you live in Portugal?Ana: I live in a small village actually. You probably don't know it. It's called Palmela. But it's south of Lisbon and it's by the coast, so it's really nice. We get a nice view of the mountains and of the rivers. So I really enjoy living there. It's really quite. Not a lot of people. A lot of wine farms actually and really nice food. You should come and visit sometime.Michael: I like wine. And so you have good wine in Portugal. What sort of food do you eat in Portugal?Ana: Let's see. We get a lot of fish because we're by the sea. And so codfish is a traditional and sardines and mackerels.Michael: Oh, I like sardines.Ana: Yeah. It's really good. And we also have really good desserts. So for example, coffee cake, yogurt cake. We've got pastel de nata which is kind of an egg tart thing. So I really recommend you try that with our coffee when you go there.Michael: All right. And you speak Portuguese as your first language.Ana: Yes, I do. I speak Portuguese. It's not the same as Brazilian Portuguese but it's really close and we can understand each other. So that's really great.Michael: All right. And can you understand Spanish as well?Ana: Yeah. I can understand a little bit of Spanish but there are some differences between Portuguese and Spanish.Michael: How do you say hello in Portuguese?Ana: Oh, you can say, "Ola."Michael: Ola.Ana: Yeah, it's fun. You should learn some Portuguese.Michael: Oh, I'd love to.

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第964期:Life in Portugal

Play Episode Listen Later Sep 5, 2020 2:25

europe spanish spain portugal portuguese lisbon brazilian portuguese michael oh michael how palmela ana let michael all

The Showdown of The Century (Round 3): Remote vs. Local Investing

Play Episode Listen Later Aug 4, 2020 40:06

In this episode Tom and Emil go head to head to debate which investing strategy is superior, local or remote investing. --- Transcript Michael: Hey, everybody. Welcome to another episode of their moat real estate investor. I'm Michael album. And today I'm joined by my usual hosts, Tom: Tom Schneider Emil: And Emil, The Real Deal, Shour. Michael: Ooh, I love that self-proclaimed nickname. Love it. And today we're going to be doing another show down. We've got a lot of feedback from our listeners that showed on episodes were well received. So today we are going to be debating the pros and cons of remote investing versus local investing dunked on done. Well, guys, let's jump into it. Emil: That was actually a nickname that someone I went to college with gave me. Michael: Okay. So it wasn't self-proclaimed. Tom: Emil, The Real Deal. Emil: We were in the same frat and we had like boxing night and… Michael: that's so good. Emil: He introduced me as Emil, The Real Deal! Michael: I would never go on a boxing match with anybody that had that intense of a nickname. Emil: Those people went down. Went down hard. Michael: Okay. So for any of our new listeners out there, my name is Michael Albaum and I'm the head coach with the Roofstock Academy, Roofstock's education arm, and Emil, do you want to tell us a little bit about yourself and who you are? Emil: Yes. My name is Emil Shour. I work on the marketing team here at Roofstock, which if anyone's not familiar, it's a marketplace where investors come to buy and sell single family rental homes. And so I work on the marketing team. I actually invested through Roofstock's marketplace before I was employed here. And now I have the joy of getting to spread the word. Michael: So you're drinking the Koolaid. Emil: That's right. Tom: An evangelist! Michael: That's right. And Tom, who are you my friend? Tom: That is a deep question. Michael: Start at birth! Tom: Start at birth. So I am an investor. I'm a California broker. I work here at Roofstock on the investor education team. I initially worked at one of the very first publicly traded REITs, doing single family rental, kind of in the wild West of 2009. And then our CEO went and was a co founder and starting Roofstock. So I jumped over and joined him at Roofstock on the product side and the operations. And now, as I mentioned on the investor education side. Michael: Awesome. Love it. Tom: Before we get into the meat of the episode, a quick announcement as usual, this episode was brought to you by Roofstock Academy. Roofstock Academy is Roofstock's education program to get you to the next level. We include over $2,500 worth of marketplace credits on demand lectures, one-on-one coaching group coaching, all kinds of benefits. And we have this new benefit that we put together that Michael is leading it's our book club. Michael: Within the Roofstock Academy, we actually do a monthly book club. We get together and read the same book over the course of the month that has some takeaway, some motif, some applicable things to real estate investing. And we get together at the end of the month and we have a chat about it. And cause now it's COVID, we're doing that all virtually, but hope to be able to do that in person at some point down the road. And this upcoming months book club book is Michael Uber's, one rental at a time. And as an added bonus for this month book club, we're actually going to have Michael Zuber on that call with us as kind of a fireside chat. And as we're going to be discussing his books, we get to hear it from the source himself about some of the reasons he wrote the book and some of the takeaways from the book as well. So now is the opportune time to join the Roofstock Academy roofstockacademy.com. So you can join us for that monthly book club and take advantage of all of the other advantages the Roofstock Academy has to offer as well. Emil: For people who aren't familiar with Michael Zuber, he's been on the podcast twice. Good friend of the podcast episode 11 was the first one we had with him, the power of four rental properties and how it can change your life. And most recently, I think we, we dropped an episode with him this past week called how Michael Zuber Quit His Job On a Whim After Achieving Financial Independence. So if you're not familiar with who he is, go back and listen to those episodes. He's a super, super smart guy he's been investing for. I think 20 plus years. Now he knows a lot and has a really, really awesome message for other investors. Michael: So today for our shutter and episode, we're going to be taking two sides of this argument and splitting it up a meal. Why don't we give you remote? We'll give you a remote and Tom, you're going to have to defend local investing. Tom: Yeah. A classic episode, a classic discussion for the remote real estate. We're going to, you know, try not to be too biased… Michael: But it is called The Remote Real Estate Investor, Tom: But it'll be fun. It'll be fun. I don't know. Yeah. It's fun going to the other side of the table. So.. Michael: I think it's important to address and acknowledge both sides of any topic of any discussion because it's two sides to every coin and there is no one size fits all approach, even though remote real estate investing is far superior, but we're going to get to that in the episode. So a meal, would you like to go first or second Emil: I'm game for either Michael? Michael: Okay. Emil: You're the moderator. Tom: Go first Emil. That way I'm giving you a heads up. I'm handicapping you alright, Michael: Emil, the floor is yours. Emil: All right. So I have three points I want to hit here. That Tom is going to have a very hard time rebutting. So the first one is that with remote investing, you buy where it makes sense. So if you're a local investor, you're looking around at your local market, you're geographically constrained to just the deals around you. So if you live in Los Angeles or the Bay area, like we do, prices have gone out of control. Prices have gone up a lot and rent has not been able to keep up with that. So in certain markets, it's very hard to find cash flowing properties, unless you have a lot of money, put a lot of money down. It's very, very hard to make those work. There's still good markets. It's just harder to make the cash flow work. So when you're a remote investor, you buy where it makes sense. You look at different markets, you look at where deals are, where the fundamentals are good and you invest there. You're not geographically constrained to only where you live. You go to where the deal is. Makes sense. The second point I want to touch on is you get to build a team instead of doing everything yourself. I know personally, if I was investing locally, I would want to do a lot of things myself, instead of relying on other people, finding the right team. And I think that's an advantage in building a team because these people are professionals. I'm not, I'm not a professional property manager or inspector any of these things, but being the person I am and liking control, I feel like I would try to get my hand into too many of those things. Whereas when you're remote again, you have to rely on the fuel. You have to build a team. And so I think that's one of the advantages of going remote is you're required to build that team of professionals. The last one I want to touch on before I get on the floor is I think with remote investing, it's a lot less emotional and more about the numbers. I think when you go and view properties all the time in person, it's hard to ignore some of the blemishes that you bring to the property, right? You have some bias. You're like, Oh, would I live here? And with rental properties, especially for cashflow, that's not what matters. It's do the numbers make sense in a market that I like. And is this an area that I'm comfortable with? The risk it's not about is this somewhere I could see myself living. And I think if you're doing the local investing, you bring a lot of that emotion in looking at a lot of the properties you look at. Michael: Wow. Tom, come back from those man. Tom: I like it. I'm so confident. I'm going to slow roll a little bit. I'm actually just going to compliment a couple of your points before I stepped back and do the fade away three while kicking my leg out for you to run into it for me to get an extra free throw. So yeah. Emil: Okay. James harden. Tom: Okay. So to honor my comment there, I love the point about how it allows you to not kind of get in your own head and just be super data-driven about it, but okay. Onto the good stuff, I'm a good stuff. So investing local is definitely the way that you want to do it. So I think the first point that I'm going to make, which could be the most relevant is you're never going to know a market better than your own market. And me personally, I've been studying the market since I was about eight years old. I'd go to Safeway, I'd get the homes and land magazine. And I would just study comps. And I had this long trend of analysis. I know the different markets, different property types, how they're trending. Heck I even know the agents, right? The Kerses family out here, great agents. So you're going to know a market a lot better just from, you know, kind of hounding your local Zillow or Redfin or whatever. Basically the adult version of the homes and land magazine from the Safeway. All right. The next point is, man, what value is it to be able to touch and feel the house, you know, to go up to the house and touch the walls and kind of like smell it. You can't do that remotely. And one of the reasons people like investing in real estate is because it's a tangible asset. It's, it's something, you know, you're not buying some future of gasoline because the price of crude is low. You know, it's an actual asset that some people actually use using by doing it remotely. You're kind of getting away from that. You're getting away from that touchy, feely wonderfulness of buying a house that you can actually see and walk into. And you know, you get out of the ethereal, if I steal a word from Michael here, it's a nice to the realleal, so, you know, you're being there. So that's number two is the tangibility of it, of actually being there, getting to go see it. It's pretty awesome. And lastly is you're not going to get taken advantage of, you know, doing things over the phone. You're going to have these quick talking sharks, selling you snake oil and all kinds of trouble. So I like to shake somebody's hand or I guess nowadays is you do an elbow bump of, you know, getting, if I'm going to do business with somebody, I'm going to want to get to know them. I'm going to want to look them in the eye and touch elbows or whatever we do now with COVID and you can't do that in zoom. It's just super awkward. So there you go. That's why you want to invest locally. Michael: So, Tom, what would you have to say to some of the meals points that he brought up? Tom: All right. Let's do it so well, I, I quite agree with a lot of appeals points. I totally agree. I mean, I don't want to waste my, you know, momentum for when we switched sides of the argument, but there is a lot of limitations on only looking into your own area, but you know, just when we say local, that doesn't mean you have to do everything, you know, within five miles of your house, roll it out a little bit further, you know, go 30 miles go a couple hours. So we were talking before the episode where we were talking about our experience with local investing and I have done some stuff working for fun, not with my own money, doing local investing, but Michael has invested locally. I would consider, you know, within that three hour range that kind of counts as local. So to address that point about, you know, not being specific things in your area, you know, rollout the distance, the radius, spread it out a little bit further. You can still do things locally. You know, if you're uncomfortable going 2000 miles away go 200 miles away like within striking distance. So that would be my point number one. The point number two, about being comfortable about using other folks is, you know, it's a muscle and if you're uncomfortable, you know, going a hundred percent building a team, that's okay. Just kind of pick points and spots and build that muscle of getting trust in getting good at letting go of things. And honestly, that's a big problem. I know for a lot of people, especially investors who are pretty generally pretty type a kind of go getters is to consciously make an effort of letting go of certain aspects of the business. So you can focus on where you have higher ROI. Michael: I've got a question for you, both that you both kind of touched on Amelia, you mentioned that if you're going to invest remotely, that you can't go see the property and that that's difficult to do. And Tom, you mentioned, you know, being local, you're able to go touch and feel and see the property, but couldn't someone who's investing remotely still go touch and feel, see, and smell and taste. I think you included in there, the property, Tom: If you're good, you will. Emil: That's right. Always want to lick the walls before you sign those docs. Michael: Check the lead based paint disclosure before licking the walls. Emil: Correct. Actually, I think the right thing to do is to lick it, to make sure that there isn't lead. Michael: That's right. Tom: It's your tongue turns blue then… Emil: Trust the verify. Tom: No, you're totally right, Michael. I mean I've for some of the house that I've bought, I've seen them, but for most of them might have nod and what the ticket is, is having an inspector because honestly, if I go to the house and my ability to assess, you know, issues is not going to be better than an inspector who like does this professionally. So, you know, having the idea that, Oh, me going out there, I'm going to be able to do a better job than some inspector is a little bit of a stretch. So, you know, having confidence in the credentials and you know, where these inspectors are coming from, and then also looking at their homework. So like when an inspector goes and does an inspection on a house, they're filling out a super thorough report on what was identified. And that is including pictures and descriptions and as well as adding any followup items that are on there. So I'm not really sure where I'm arguing on this. I got, I got going, but you know, to the point, like I think it's, yo u know, going to see the property before buying it, you could totally do that. Even if it is remote, you know, there's no reason why you couldn't do it. And it makes you get comfortable to be able to get in the game. You know, that's an expense that you can use as a writeup. I'm not a tax professional, but for that in there, Emil: Thank you, Tom, for further arguing my remote point but no, I think you're right. I think you can, like, let's say you put an offer on a property you're in escrow. You can go visit that property, put some eyes on it, make sure everything looks good. Yes. You know, I rely on pictures and video and things like that to like before the offer process. But I actually want to make that part of how I operate going forward. Obviously with COVID, it makes it a lot tougher, but the markets I invest in, I want to be visiting those more regularly. I haven't at all, but I want to be. And I think it makes a lot of sense if that makes you more comfortable go visit the property before you finish escrow. Tom: Yeah. I think I personally kind of like Seesawed a little bit on like, you know, needing to be in the market where kind of when I was in it, I think it was really important to go and check it out, to go in the other way of seeing like, nah, you don't need to see it at all. I think it's been to find a happy balance. Like if you buy a property and it hits those check boxes that you're looking for with regards to population and schools and other kind of local dynamic economy, like great. I think it's some people need to be comfortable by taking a look at the market. Great. Go be comfortable and do that. Just know that, you know, there isn't necessarily a one size fits all answer. Emil: Yep. And one last thing you mentioned being local, you know, your market way better than being a remote investor. I think that's true. I think that that'll always be the case you live there, you just, you know, what's happening. One thing I really trying to do though in the markets that I invest in is like get more ingrained in local news outside of just real estate. So I'll set up Google alerts and get the top things happening in that city to just like better understand what's going on. And I think this is where talking to your property manager regularly, again, visiting those markets regularly doing drive-through of different neighborhoods. It's just going to get you better and better at these different markets. Michael: That's a really great point Emil. I'm going to piggyback off what Tom said. I always talk in the Academy with members about if going to the market is what's stopping you from investing then by all means go, but you'll have to kind of face the reality of everybody has personal biases and you're not going to be able to unsee undue, unexperienced, the things that you see and do and feel, and experience in that market for better or for worse. And so the ideal scenario is you pick a market that has good numbers, has good metrics and you go see the property and you love the property and you love the market, but that's not always the case. Just like you said Emil is that it doesn't necessarily matter how it makes you feel because you might not be living there. If the numbers make sense and the facts are there to support the market, it could still be a great investment independent of the fact of whether or not you enjoy it. And so if you go somewhere and think, wow, I would never live here. I don't want to invest here. Now we're mixing emotion into the decision making process, which can really be dangerous. And so if we can go with the guys of understanding that it doesn't really matter how I feel, if I feel great, that's kind of a cherry on top, but I should still be willing to invest. Even if it doesn't make me feel good. That's something to think about. Tom: That's a great point. I mean, so much of this is an introspective exercise where it's like, okay, what do I need to do to know that, you know, I feel good about investing in this area. And I think it's a great point, Michael, that it comes to a point where you need to be a little bit just focused on the numbers. But if you know that you're going to need to kind of touch it and take a look just at the market in general, then there's no reason that you can't do that. And I like the happy balance of, you know, if there's a market, you know, going to take a look at the market and not necessarily, if there is a property to look at great, go look at a property, but you don't necessarily have to look at the one that you are investing in, but you have like a general kind of taste of the area. If that's something that's important to you, there's no reason why you can't do that. But to Michael's point, like at the end of the day, the numbers are really what carry the day trust in the process. Emil: All of us kind of agree that the numbers, aren't the only thing that drive us, right? If it's like awesome cabaret cash on cash, but it's in a really rough neighborhood where we don't see that neighborhood turning around or whatever it is. I don't think any of us would invest there just because the numbers on paper look really good. There's a lot of other factors that we also take into account as well. Michael: Yup, absolutely. Alright. This was really great. And I want you guys to flip flop, Tom, why is remote investing far superior than local investing in meal? You've got to defend because you got to go first, last time. So now Tom's on the offensive. Fight! Tom: Emil, welcome to 2020. The world is your oyster. Get out of your little hole, get your head out of the sand, you Flamingo is that the animal does the… Michael: Ostrich. Tom: You're, you're being an ostrich. And you know, there's been some advents in technology that has allowed us to invest remotely. One of them is cloud computing that allows for you to have access to incredible amounts of data outside of your backyard. So cloud computing, that's one, the other is, uh, mobile phones. Uh, there's all kinds of cool technology that didn't exist before that Roofstock leverages and other, you know, potentially brokerages. Um, have you guys seen, have you heard of the 3d walkthrough? Right? So inside maps, Matterport, very cool companies that allow you to basically walk through the house as if you are there. Not only are you being more psychogenic, you're just working smarter, not harder. So you're able to check these houses out at a really in depth level without needing to go there. You're saving gas mileage. Think of, you know, you're being green, okay. Cloud computing, tons of data, cheap data on markets and evaluating other markets. Number two, mobile applications, mobile devices. And with that is the ability to have these really cool 3D walkthroughs to have a proliferation of inspections available. I know at Roofstock we use some cool mobile phones in using for our inspection capture leading to my third point, this ecosystem, right, that has developed around companies. So one such as Roofstock that basically does all the work ahead of time. All the benefits you would get from local investing in that, you know, being able to find these local partners, you can do really easily through platforms like Roofstock, which will connect you to all the partners that you need. Be it insurance, be it in lenders. Now I'm not saying you can't use that same grit that you would be using locally, remotely. You should still apply that and apply it in a very diligent way, but all the drawbacks of doing it remotely that used to exist no longer exist, just because of the way the technology has advanced the way the cool companies like Roofstock has advanced. And the proof is in the pudding. I know just off the top of my head, I think there's been, you know, over over $10 million of transaction within the Roofstock Academy community, over $2 billion worth of transactions on the Roofstock community. So the proof is in the pudding. It's, you know, if you're not doing it right now, Emil, remotely investing you're behind. So, so get on the train. Michael: Tom, what do you have to say about the interwebs, the online, the www online's making remote real estate investing easier? Tom: Uh, you mean the connected tubes? Michael: Yeah, Tom: It honestly it shrinks the world. It's fantastic. And the big value points I think in there is just access to data. So being a data driven investor, I want to know what are some reputable sources for evaluating the local schools. I want to do a walk around on that block. Oh, wait a minute. I, can I go to Google maps and do a little walk around? That's fantastic. And honestly, again, you get a pretty good taste of, of being able to do it that way and getting the curb appeal and all of that good stuff. So the internet, I mean, it, it honestly would not be possible without it, but just as we've, since we've come so far since AOL and 56K modems or whatever, it's like, you know, on my phone, I could do a diligence on a property that honestly, the top private equity or top real estate investment companies could do it, it would cost them thousands and thousands of dollars to do on an individual property that I could do for free, just on my mobile phone while I am walking in my living room, in a local area. So the cost of doing the kind of diligence at an incredibly thorough level has gotten so cheap and so accessible. That there's just no question that remote investing is here and jump on board toot toot. Get on the train toot toot. Michael: Alright Emil, you need some ice. Are you feeling okay? Are you ready to start swinging back? Emil: I'm ready. You know what? I think Tom just convinced me to become a remote real estate investor. You opened my eyes. Michael: You didn't know this other world existed. Emil: I had no idea about this, what podcast are we on? Michael: Someone get this guy, a mobile phone. Tom: Yeah get him a mobile device connected to the internet. Michael: To the interwebs. Emil: All right. I'm going to try not to rehash too much of what Tom mentioned. Hold on. Let me get my dog to shut up, one second. Zeke!! Tom: So Mr. Michael Album, I hear you are doing some remote investing to the extreme. I've been following you on the Twitter world and yeah. Michael: That's… No one should do that. That's a scary thing to hear. Tom: Yeah. Doing remote in the United States is one thing, doing remote on the, across the Atlantic? Emil: Portugal! Michael: Going very far East, stopping once I hit Europe, I'm actually currently investing in some properties in Portugal. There is something called the golden visa that I'm looking to take advantage of. And one of the ways to get a golden visa, which is basically permanent resident status, and then ultimately a passport after a five year period is by investment in the country. And so that can take the form of a few different ways. And so one of the options is investing in property. And so I'm looking to actually flip a property right now and then purchase a property for a long term buy and hold to get me access to that golden visa. Emil: [sings] You go the golden visa, you got the golden visa. It's made up, it's fairy dust that someone sold Michael Michael: And so you, Oh, that's right. That's right. Yeah. Speaking of buying snake oil. Tom: Was this specifically for the golden visa. Michael: It is, it is. So the returns are not anywhere near as attractive as what you can get in the States. And so the fact that you can buy an investment property and have it generate some kind of return is really a cherry on top. The real premise and the real Genesis is to get a golden visa and ultimately a second passport. Tom: Wow. Michael: So just being able to travel work, live, receive healthcare in the EU, any of the EU countries essentially for free. And so having the benefits of an, of an EU citizen and potentially be an EU citizen after five years. Tom: Wow. So you would be a Portuguese and an American citizen. Yes. Very cool. Yup. Nobody knows any Portuguese out there that wouldn't mind tutoring me a little bit. I would love the help because I am pretty useless. Tom: Portuguese is a difficult language. I went to Brazil for a little bit and Holy moly. I do not. Yeah. It was a… Michael: It's so foreign and it's so fast. Tom: Obrigado! Michael: Yeah. Yeah. That's right. That's thank you for anybody listening. Nobody got it. Alright. Emil you're ready to punch back? Emil: Alright. Knowing your market. I think that's a big advantage. If you're local, when things happen, you can go visit. That's another big one. The other three I wanted to mention are I think it's a lot easier to project manager rehabs. A lot of times when you're, you're doing a rehab or any type of any type of rehab from distance, you're trusting a lot of people project managing it. Isn't the easiest. Sometimes property managers will do it for you. It's a service they will provide. Sometimes they don't, but you're relying on pictures to kind of make sure each interval of the rehab process is happening. And a lot of times the little details are harder to see through pictures or anything, right. You want to make sure that it work is done right. And I think when you're local to be able to go and see the work that's being done, it's a huge advantage to make sure the little things weren't skipped or things that show up in picture that look okay, but you actually view it in person. You know, the paint is splotchy or things like that. You can verify those things in person, much easier to do when you're local. The other one is this kind of ties into knowing your market, but where you live and where you are locally, you, you probably believe in that area. You probably believe in that economy. That's probably why you're there. You have a job, whatever it is when you're local, you probably have a sense that this area is going to do well for years to come. And you're trying to ride that wave of appreciation. Whereas when you're going remote harder to know all those things, you don't live there. You're not living and breathing and in that place and knowing what the local economy's doing. So I think when you're a local, you just have a better sense of is this place on the rise? I think most people live somewhere where you think things are going well. So that's another advantage to local, I would say. The last thing I talked about building a team, when you're remote, you have to build a team. I think when you're local, you build a team too. People will find your deals, property management, all those things. But the advantage of when you're local is you can actually go meet those people face to face, interview them a lot easier than when you're remote and you're just calling people. There's less of that personal connection. And I don't know when you meet people in person, you take them more seriously. They take you a little more seriously, not always, but I think it's actually easier to build a team when you're local. You do it for remote and local. And I think it's just easier to local. And that's it. Tom, go ahead. Tom: Alright. Last couple of points I'll make on yours. You know, talking about investing in a market that you kind of believe in, you live in something we've learned over the last, I don't know, 30, 30, 40 years of investing is diversification is key. And a lot of people, their biggest investment that they make is going to be the house that they own and live in. And if you're making your biggest investment, obviously in an area that you live in, cause you live in it, why would you, you know, basically just double down on that same area, when you can diversify a little bit and put that money to work in an area that, you know, there might be some correlations with the economy because there generally is, but is subject to other upside and other kind of benefits. So being able to place your chips around. So instead of owning multiple houses in the same area that you live in already, where you have your biggest investment, the benefits of mixing it up and putting it into a different area, there's lots of value to diversifying that play. Michael: Would you say Tom, that you would peanut butter spread the risk? Tom: I love peanut butter spread. So my wife has started getting groceries from this place called Thrive Market and they have peanut butter in a spreadable packet. Pretty sweet. Michael: Different than Justin's? Tom: I don't know if it's Justin's I don't think it is, but anyways, it's not in a jar. It's like toothpaste packets. It's like toothpaste Michael: Just on the go packs. Those things are great. Yeah. Tom: I think I'm kind of violent about it. Cause I like burst a hole, like in the side. So peanut butter spread the risk, right? Just like spreadable peanut butter. You spread it apart. I guess the last kind of general point that isn't necessarily arguing to one way or the other remote or local investing is with all of this. It's not a one size fits all. I think all of us agree that, you know, while there is a little bit of unique requirements for investing remotely, ultimately the different types of returns it gives you access to and the diversification it gives you access to is it's worth that little bit of overhead. And as we mentioned before, then this episode, there's, there's different ways that people can get comfortable in different areas. For some people, they just get it right away and they can jump right in and invest. And that's awesome. That's great. For some people they want to be a little bit more hands on and go and visit the area, perhaps even talk to property managers and that's okay too. Just kind of know where you sit and know what you need to do to get there either to move forward with an investment or to move on to some other type of investment. So I'd say as a theme in this podcast and real estate investing in general, have a bias for action of getting yourself into a position to either make the investments or to move on. Let's see the last little recurring theme that I think probably talk about every other episode is, as a remote investor, there really is no one as important as your property manager. So even if you're doing it locally too, and using professional property manager, your investment is gonna live and die by how well someone's going to be able to manage that for you and get, at least if you're not self managing and using professional property manager. So, you know, it doesn't matter if you're doing remotely or locally, but you know, especially if you're doing remotely, since you're not going to be able to visit the property that often do not sleep on the work that it takes to assess and qualify a property manager because you know, buying right can take you so far, but ultimately, you know, winning the operational metrics and keeping your overhead low is going to be on getting a good property manager. Who's going to keep that property occupied. So those are my final tidbits on it. Emil: Well done. I know I don't get a rebuttal, but I thought those were all very strong. Michael: I thought you both had strong points nicely done to you both. I'll share a little bit. Tom: I'm excited for the Michael tidbits. Michael: I was just going to share that I've done some, you alluded to it previously, Tom, but some quote unquote local investing. It was really, my first investment was down in Southern California, which we talked about on a previous episode, but I couldn't fathom investing remotely or out of state or really at much of a distance just because I was so green. So new to this space, you know, Roofstock wasn't around this whole education piece for a, Roofstock Academy wasn't around. And so that's all I knew. And so it was about three hour drive away from my grub. So it was semi local and I went and touched and toured a bunch of properties and met with my local agent who is a family friend who is also my property manager. So to Neil's point, we could touch a shake, hands, have visual rapport, physical rapport, which I'm kind of old school in that regard. I would always prefer that. I think it's much more meaningful than the remote over zoom or over the telephone. And so I was able to be very hands on with that investment. And it's gone really well, given a long enough time horizon for anyone who listened to that first episode where it just like that property has been through several road bumps, several hiccups and speed. So the fact that it was local did not have any bearing on how difficult it was as a first property. It did not have any bearing on how bad or how sideways things could go. And that's been by far probably the worst experience I've had with any of my other investments. And so you can have good people and bad neighborhoods and bad people in good neighborhoods in local markets and at distance markets. So it's, you know, again, I think we said it before, it's not a one size fits all. You just, every investor has to figure out what makes the most sense for them and Tom, you were just touching on it. I think if you need to baby, step your way into investing and start local or semi local, do it. If that's what it's going to take for you to start getting into the real estate investing arena, you know, start where it makes sense for you. Some people have no problem letting go of control and just doing it at a distance and setting up a team and kind of taking a back seat so to speak. But if that's not, you figure out how you operate as a person and figure out what's going to make the most sense for you. And then just go do it. Emil: So for anyone who was curious about Michael's first deal, we covered that in episode 12, Here's What Our First Deal Looked Like and How They're Doing Today. That was the name of that episode. But I think, you know, the, the main theme, I'm glad you touched on that is there's people who are successful doing both right. There's people who are just local investors in expensive markets who are doing really well. People who just do remote investing, who are doing really, really well. And there's some people who do both, right. They do some local, some distance. And I think that's like the main thing we want to highlight. I don't think one is necessarily better than the other. It kind of just depends on your situation. And I think there's people doing well and doing both, Michael: I think I want to just double down on that statement Emil. It is so dependent on who you are as a person and where you live. Because if someone's living in the Midwest right now, listening to this, so like I'm surrounded by deals. Why would I ever go remote when there's tons in my backyard, us being all Californians were, you know, semi-forced to go remote and you know, forced to go invest at a distance. So if that's not, you don't think that, Oh, I have to go invest remotely because of everything they talked about in the podcast, maybe, you know, our remote is your local, Oh, that's a trademark, Michael Albaum, July 28, 2020. Emil: Our remote is your local. Michael: Yeah. So just go find where the deals make sense. I think is the one of the biggest takeaways because they could be read under your nose and you might not even know it because you're so focused on remote. I absolutely looked at local as a first opportunity semi found it and then how to go remote after the fact. Michael: All right guys, I think that was a great rap battle for remote versus local investing. And before I let you guys go, I've got the question of the episode for you. Are you ready? Tom: Let's do it. Emil: Always. I'm rabbit, baby. I'm winning this rat battle. Michael: What's your favorite breakfast cereal and why? Tom: I'm ready. Michael: Tom go. It's called Magic Spoon. It's not made with normal sugar. It's made from the sugar of raisins. So it's actually being promoted on a lot of podcasts. We're not being paid to promote magic spoon here. We have no affiliation with any royalties, but we're not opposed to it. And so magic spoon is basically children's cereal for adults. It is delicious. It doesn't have carbs. It's full of protein. What's great about not being, you know, I could just kind of say, say the good things about it and not necessarily have a check, a reference check on it, but it's, it's really good. Magic spoon, peanut butter. It's great raisin sugar. Michael: So if it doesn't have carbs, like what is it like, what is it made of? Emil: Fairy dust. Tom: Magic spoon. Emil: I've heard of that. It's expensive. It's not cheap. Tom: I can't believe how expensive it is. Don't get me going on that. Michael: There was this like frozen yogurt place that came out. I don't know. Maybe this is like going back 15, 20 years and kind of dating myself. But it's got like golden spoon, in Southern California, but I like the name gives you no indication of what the thing is. Like you would never think that's an ice cream place because it's called the golden spoon. Am I the only one that thinks that, sorry, golden spoon… If… Tom: Spoons got range. Alright Emil, how about you, favorite cereal? Emil: Does granola. It's like a granola cereal kind of thing. It's called Autumn's gold. I found it recently a Costco and it's like all nuts and cinnamon. So kind of same deal. It's paleo. No carb. I try to eat paleo during the week, at least. So that's probably like the only cereal these days I eat. But if we're, if we're aligning the clock, favorite cereal growing up, it's gotta be them Lucky charms, man. Michael: They're always after me Lucky charms. Tom: Are you a guy who eats non marshmallows until the very end? And then you just go all marshmallow. Emil: Is there any other way to eat Lucky Charms? Michael: I don't trust anybody that eats Lucky Charms any other way? Emil: Yeah. Tom: Yeah. And remember that like promotion. They are like, oops, we made a mistake and just marshmallows, man, that person on the factory line. What a moron! Emil: Or a genius dude. He sold so many Lucky Charms boxes and he was promoted to like vice president. Tom: VP of product. Michael: That was like Playdo. Wasn't that? A mistake invented by mistake. So many of the greatest things. Pierre: Sticky notes. Tom: Sticky notes. Michael: Yeah. There you go. Alright, Pierre, what's your favorite breakfast cereal? And please don't say like the last pizza episode. I don't like breakfast cereal. Pierre: Well, okay. I don't eat breakfast cereal for breakfast. It's more of a dessert. If I'm going to eat cereal, it's going to be before bed. Michael: I don't always eat breakfast cereal, but when I do it before bed. Emil: I'm with Pierre man. Tom: I like that tip. I like that take, unless it's magic spoon. Go ahead. Pierre: Hmm. Chocolate granola, chocolate hazelnut granola. Michael: Nice, particular brand? Pierre: Oh man. It doesn't matter, really. I was raised on coupons, so whatever's on sale. Tom: Michael, you got one? Michael: You guys are all healthy. I'm like cocoa puffs fan. I like my milk, but I prefer it to be chocolate. So that's really all it is. It's just a vehicle to get more chocolate milk. I don't really care how it tastes. Emil: That is true. Just gives you chocolate milk at the end. Michael: That's right. Tom: I had a roommate, shout out to Carson Mobly. His, uh, he had this quote about food is just a vehicle for sauce. Michael: I've always felt that way about carrots and celery. It's just like, how do I get bar ranch into my mouth in a faster, more efficient way. Tom: It's just a vehicle for sauce. MIchael: That's great. All right, everybody. That was our episode. Thank you so much for listening. If you liked the episode, feel free to give us a rating or review wherever it is you listen to podcasts. Also feel free to subscribe so that you get the most up to date episodes automatically downloaded to your listening device. We look forward to seeing you on the next one. Happy investing! Tom: Happy investing. Emil: Very formal, happy investing.

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Ask Us Anything #1: Selecting Markets, Advice for First Time Buyers, Loan Types & Flipping Costs

Play Episode Listen Later Jul 14, 2020 22:18

This is our first ever AMA, where we answer listener submitted questions. --- Transcript: Emil: Hey, everyone. Welcome to another episode of the remote real estate investor. My name is Emil Shour and I am joined by Tom Schneider, Michael Albaum. And today we are doing our first ever AMA, ask me anything. So we posted an episode, a short episode last week, asking you guys to submit any questions you have to us. And, we also posted on social. So we've got a combination of people dialing in people asking us questions on social that we're going to tackle in today's episode. So let's start answering some questions. Theme Song Emil: All right, guys, tell me how excited are you to answer these listener submitted questions today? Michael: Before Tom goes, I'm the most excited I win. Tom: Aah, I'm really excited. And honestly, I think this can be kind of a recurring segment. So some of the stuff that we all do is we also do webinars with rooftop webinars, go check it out. Really great webinars. Anyways, we just like save time at the end for questions. And there's always so many good questions that we don't have time for. It's like it could be its own segment. So I think this whole AMA thing on the podcast could have some legs and be as core sort of a recurring thing. Like maybe we throw an episode in the middle of the week or talking about this before. So with that said, do not stop submitting questions. Just keep firing them in, and we will get to them. I think it could be a longterm thing that we do on the podcast. Michael: We're going to start a question bank, so to speak. So it keeps sending the questions like Tom said, and we will get to them as soon as we can. Whenever we have time on these AMA episodes, I think it's just so great because the whole point of this podcast was to give the people what they want. And so now that we're getting questions directly from listeners, I think that's super, super valuable. And chances are, if you have a question, somebody else has it as well. Tom: And I mean, what's fun about it is we as the host, like have some experience, but if there's stuff that's like outside of what we know we're going to bring in folks to help answer those questions. We have access to a lot of resources and a lot of smart people, so do not be shy about if it's a question, a little more novice or it's a little more advanced, we will get the right people in front of the microphone. Emil: Yeah. And we actually, we've got a lot of good questions. A lot of these I'm curious about myself, so I'm hoping maybe you guys can help answer them. Cause I'm like, Hmm. Some of these are really good. I don't have experience with these. So, all right. Let's start, let's start tackling. Some are the first one we have is submitted by Shailen. Let's, listen to that question right now. Shailen: All three of you have spoken about how you live, I think in Southern California, but you manage properties all over the country. How are you familiar with those other areas? Have you lived there before? If not, is there, do you travel there to figure out what a good neighborhood is? Rootstock has neighborhoods, but it's hard to know exactly what these mean for renters. If you've never lived there or visited there, can you elaborate more on the remote investing concept? Should you have three to five properties in one city or town before you go to the next town? Or are there some locations where you only have one property that you own? Emil: All right. So great question all around. How do you choose a market as a real estate remote real estate investor? So this is a massive topic and we actually covered it on a previous episode, episode 21 called the art and science of choosing a real estate market, where we do a deep dive on how do you actually choose a real estate market? It's a long conversation. We spent about 40 minutes talking about it. So Shailen, definitely recommend you go check that one out. Some of the other things you asked about, do you choose one market and buy one property there or do you choose a market and buy several from personal experience? I have, but single properties in different markets. I have markets where I just have one property and I actually recommend people not do that. Now, just from my personal experience, I think it's probably better to choose one or two markets get really knowledgeable on that. Know what properties sell for. You're just, it's harder to be good at many markets versus choosing one or two and, and getting really good there. So even though I've done the one property in multiple markets, it's not necessarily what I recommend for other people. You guys have anything else to anything that there? Tom: Yeah, you don't necessarily, I mean, just, you know, we had that episode, but to kind of just a Tom note on the topic is you don't necessarily have to go to the market, but have some parameters in the way that you're selecting a market. Be it population, be it like what type of economy is going on and diverse economy. So don't do the, throw the dart at the map method, like have some insight on how you select a market, but you know, you definitely don't need to, necessarily to go there and also to get educated on the market with regards to the different pockets and know what kind of expected returns that you would get be it gross yield. So when you're evaluating a deal, you have some context of this is a good property based on this area, or just wherever you decide to do an investing in market, just get educated on the market. Okay. Michael: And just to echo that Shailen last thing that I'll add is if you're going to be remote investing, you're going to be relying on a lot of people to be your eyes and ears. Anyhow, most notably is probably going to be your property manager. So this is a great opportunity to start putting that relationship to the test and utilizing people that are remote. Anyhow, because if you go, if you need to go and physically be there in order to make decisions, well, anytime a big decision needs to be made. If you need to go get on a plane or get in the car and go drive there, that makes for just a tougher ownership process. So just consider that when you're thinking about investing at a distance property, managers can be your best friend Emil: And Shailen asked about the Roofstock neighborhood rating. And so for people who aren't familiar with that, Tom, can you give a background on that? I know you have on previous episodes and you always describe it very well. Tom: Neighborhood score, excellent point. So I think in a future episode, we're going to bring on someone from the data science team to get a little bit more into the weeds, but at a very high level, Roofstock pays a bunch of money for data. A data that has to do with historical population changes, changes in the economy, crime school, as well as forecasting out. So the neighborhood score is the synthesis of all that data that Roofstock collects. And it presents a simple one to five star score of five being, wow, this is a neighborhood that we think would make a great investment with regards to lower risk and better opportunity for appreciation where a one-star would be higher risk though. So that is the neighborhood score at a super high level, but I'm writing down as a note, we're going to bring on the data science team on an episode and grill them into the details of the Roofstock neighborhood score. Emil: Awesome And again, for anyone who wants a real long, deep dive of how to choose a remote market, make sure you listen to Episode 21 called The Art and Science of Choosing a Real Estate Market. Tom: All right, Robin from Wisconsin says, I love the show. You guys are super helpful in past episodes. You guys have mentioned you prefer investing in Metro areas versus suburban. How do you define Metro and why is it your preference? Do you consider cities with populations close to 200,000, like Akron, Birmingham, Greensboro to be Metro areas? Is there a population cutoff? So I'll take the first stab at this when I think of a Metro and I'm sure there is like a technical definition for that, but I think of a collection of cities that would like make an area. And also just to be clear, like, I don't think suburbs are bad. I think rural areas are a little bit risky just because there's typically not a very diverse economy, but I think suburbs are great. And actually a lot of my investments are in the suburbs of big cities, but back to kind of asking about defining a Metro, I think of it as a greater area. So if I'm thinking about Dallas, I would be inclusive of Arlington Fort worth. They're all kind of like within striking range of each other. I live over in Northern California in the suburbs of San Francisco. And I would say the Metro of that, you know, San Francisco would be Oakland, San Jose, Walnut Creek, Concord. So I think of Metro as kind of the broader, this wouldn't be too crazy of a drive to do, you know, maybe like an hour to drive across that area. Michael: To piggyback off Tom's point. I don't have a population cutoff. I don't really think about Metro in the traditional sense because in different parts of the country, it can mean different things to different people. And so I'll usually call a property manager and say, Hey, if someone's going to work in the main employment corridor or whatever that looks like, whether it's financial district, that's the downtown area I'll ask, where is someone willing to live? Where are people that are working here living? And if the property manager tells me, Oh, and these areas great, that's my radius. If you will. I've invested in pretty rural areas, several hours outside of st. Louis. And there wasn't a whole lot of economy there, but there was a military base. And so that for me said, okay, this is good enough. Granted, I was pretty green, not, I don't know if I would make that investment again, but I got really lucky. So I'm less scientific when it comes to identifying a Metro and looking for markets to invest in and the population regard. Emil: Yeah. I'm with you guys. I mean, for me, it's not even about urban or suburban. I dunno if that was part of the question, more so it's choosing a market that I think is good. And so like you mentioned St. Louis, St. Louis is one I invest in as well, and I'm in a suburb. That's probably like 20 minutes outside of the city. And I'm okay with that. As long as, like you said, people are usually commuting from the suburbs into the city as well. What I care more about is how is that city doing overall in terms of population growth are the returns there for what I'm looking for, those kinds of things. And so one thing that Tom had mentioned in one of our previous episodes that I really like is, is it a big enough city where there's at least one professional sports team? I think that's kind of like 1% rule, 2% rule. I think that's a great just first sniff test to make sure a market is even worth investing in, at least for me, I know people will invest in some of these, some tertiary markets let's call it like a Birmingham or something where there isn't.. Tom: We're going to count AAA base And the Birmingham bombers or whatever they're called. That counts, their in. Emil: They're going to break through to the MLB soon Tom: AA baseball is smaller, but AAA, it counts. Yeah! Emil: So, you know, there are people investing there who are doing really well, but just for me personally, I've always liked that as a good test. Like, is there even a professional sports team? Is this a big enough city to have a professional sports team? And those are the kinds of cities I choose to invest in. Tom: And just to correct myself, it's the Birmingham barons and they're affiliated with the Chicago white Sox from 1986 to the present. Yeah. So go ahead. Continue. Emil: That's it. I'm done. Michael: All right. Let's move on. Alright, Maddie from Facebook is asking and big shout out to Mattie. She's a friend of mine. She says, what is your advice for a first time home buyer looking to invest in real estate or buy their first property? So I talk a lot in the Academy about this and something that's kind of a hybrid of the two, because it's not necessarily a black or white decision of, I have to invest in rental property, or I have to purchase a property for me to live in is a house hack. And so if you are willing to kind of be a bit of a landlord in your own home, how's, that can be a really great way to go. And for those of you who don't know what a house hack is, basically what it involves is buying a property that has more space or rooms than you need for yourself or your family and renting out the other space or rooms. So whether that's buying a four bed house and renting out their three rooms or buying a duplex triplex or quad, you can live somewhere and make cashflow alongside living potentially for free. So it's a really great way to get involved with real estate investing as well as tackle having a to live. And so if that's not within your budget, something that I talk a lot about is that I invested out of state for 10 years and was renting the whole time. And so in my market that just made sense to do. And so I said, you know what? I'm going to invest in, invest and invest and generate enough cashflow to ultimately at one point in time, purchase a property and have my cash flowing assets pay for that primary residence, which is something I've been lucky enough to have done. Tom: Yeah. Similar situation I rented for a while, while owning rental properties. I think you're right, Michael, in that it's a product of where we live in that getting into a house to own and live in is just wildly expensive versus being able to buy an investment property. But my piece of advice would be two parts. One have a process, have a buy box. And so you're making these decisions, not subjectively. And the second one would be to have a bias for action. And I've been saying there's a lot lately. I think a lot of people get into paralysis by analysis. They overthink it. They're trying to make their best deal, their first deal. But that's, I guarantee you, that's not going to be the case. And there's just so much value to getting into the game. Michael: Put me in coach, give me a chance. Tom: Yeah. Emil: Yeah. I love what you guys mentioned here. My only addition here, and this is a personal opinion, a lot of people might look at their primary residence as an investment. And I never look at it like an investment. I think it's a place where you call it your own. It's a place to raise your family. And there's a lot of benefits of owning your own home. It might end up being an investment, right? You could choose somewhere that appreciates. And if you think about it, your mortgages in a way, like some for savings as you pay down your loan and you build some equity, but considering that they front load a lot of the interest in your principal, payment is low in the beginning. I don't see it as much of an investment. So if you're looking at this as which one is the better investment, I think you're better off going and buying rental properties. Cause those are, you treat those like an investment, whereas your home, it's a personal decision that you make because you want a home. You want to, for whatever reason. So that's the only thing I'd add here. Tom: I'm going to digress just a little bit. It's really funny. The offer making process of an investment property versus your personal residence. Cause like with an investment property, it's like, you know, I feel really good saying no and walking away, this is my firm number. Oh, you don't want, I'll get outta here. And then with your personal property, it's like, you know, you have your significant other. And it's like, Oh, they countered this much. I'm like, Oh, we should probably do it. I really want that house. The psychology of the negotiation process is just, I'm not good at doing it on my personal property, but for like my investment properties, I'm pretty disciplined. It's just really funny how the psychology of it is pretty different. Emil: A hundred percent Michael: Just to add to that. The primary property that I bought, I knew that it would one day become a rental. So I evaluated it like a rental. And so I was able to go in with the offer because I would have that same issue Tom so I treated it like a rental throughout the entirety of the process. Tom: Incepted yourself Michael: That's right! Emil: It's such an emotional decision buying your primary residence. You know, you walk in, you're like, we love this. We love the location. We love the kitchen, the layout. And you're like, it's, it changes things. It becomes an emotional purchase, not one that's necessarily rational. All right, next question is from an anonymous voicemail. We bats. So let's listen to it on that one. Anonymous: Hey there Roofstock. What's the best type of loan or a short term, single family home, an arm, a balloon loan, 30 year fixed, what would you guys recommend. Thanks. Tom: All right. So good question. So when you say short term rental, that could mean a couple different things. Is it a short time horizon that you're owning the property? Cause I think that's really relevant for the type of lending that you're getting. If you're talking about short term rental, as in just like a vacation rental, I would say, get, you know, whatever best terms you can get, I'm going to riff for a second on your hold period. Cause you can get a lot of cost savings in thinking about what type of loan to choose if you know, how long you want to hold the property for. So if you're planning to hold this with like a five year time horizon, that could be a good scenario where you would get an adjustable rate mortgage like you were referencing, just because the rates that you can get with an adjustable rates, those during that initial period can be significantly less expensive. There's risk in that if you're planning for a longer hold time, say like a 10 or 30 or whatever, how long, just because after that initial teaser period, the rates will jump up to whatever market rate is. So you get yourself in a little bit of risk. So my answer to your question and to paraphrase really quickly is if you plan to hold for a short period of time, it would definitely be advantageous to look at what kind of rates you can get with either a five to one arm or a 10 to one. But if you're planning to hold for a longer period, I wouldn't recommend that just because it's hard to say where interest rates are going to go and you're going to be subject to wherever the market rates are at. And if it is like a short term, as in like a vacation rental, I'd say get whatever best rates that you can get according to your planned hold time. Michael: Piggybacking off Tom's answer. I think whole time is really the end all be all the determining factor here. And what's going to dictate kind of looking backwards. What type of loan you should get. I would say that if your whole time is five years, look at a seven year arm. And if your whole time in seven years look at a 10 year arm, because we have no idea what the market conditions are going to be like in five years from now. So you don't want to be forcing yourself to sell a property in five years because well, the market's in the tank. And so you can't sell for... Can't make a profit on your deal and interest rates have gone up. And so that will often lower sales prices and purchase prices because their purchasing power has been diminished. So give yourself a little bit of breathing room. I would say above and beyond what your plan hold period is. And also a lot of times the savings to be held on arms aren't materially significant. And what I mean by that is if you're different than monthly payment is 50 bucks a month, you've got to decide for yourself, okay, is that $50 a month savings with a lower interest rate, worth it to have a shorter term interest term versus getting the 30 year fixed, which you know is never going to change the life of that loan. You could always refinance if rates drop that kind of thing. So the 30 year long time horizon should be significantly more expensive in order to deter you into an arm, I would say. Emil: All right, next question is coming from Elan, who submitted on Facebook, Elan is asking, how can we estimate flipping costs? How deep should we go into flip? I, how much should we spend on a remodel? All right. So Elan's question is around flipping costs. How do you estimate those out? Michael: There's a really great book that Bigger Pockets put out that's titled Estimating Rehab Costs. I'm pretty sure that's the title. And I think that can be a really great place to start. Um, and there's no substitute, I would say for getting a quote, an estimate from contractors and get numerous quotes and estimates and bids from numerous contractors, because everybody's going to have a little bit different price. That would be your best way as to how to estimate those costs. And then also chatting with local investors, local property managers, as to ballpark costs, they're going to have rough ideas of what things cost in that given market. And that's going to vary from market to market. So we can't say, Oh, do we have a house in San Francisco is going to cost the same to rehab a house in Northern Kentucky. Those two markets just aren't the same. And as far as how far to go on your rehab or on your remodel, that also, I would suggest talking to your property manager because they're going to be able to give you some insight into what upgrades are going to bring you the most rent. Also chatting with an agent about what upgrades are going to bring in the most resale value. Once you've targeted your demographic, who you're going to sell to whether that's owner occupants or whether that's in other investors, because an investment flip is very different than an owner occupant flip. So that's what I would say on that. Tom: Yeah. And my feedback, a really common process for these type of flippers is you partner, you have a general contractor who knows exactly what you're doing that you trust and you have some sort of relationship with, and you get a property in contract and during your inspection contingency, that's when you can have him go and price everything out. So you have that contingency to get out. If the deal doesn't pencil out, but the real key takeaway is don't buy a property and then try to figure out what the costs are like, have that as a part of your process is during your transaction contingency. So you can get out if it doesn't pencil, you know, you make your best guess when you're submitting an offer on what you think the costs are going to be. And that's where the, you know, books like Bigger Pockets books is really great. But once you actually have money, skin in the game with an earnest money deposit and you're in a transaction, you want to get that number of what it's going to be. And sure, there's sometimes going to be surprises of when they open up a wall or whatnot, but you're putting your best foot forward during the transaction period of getting an actual cost from contractor partner or, you know, vendor that you're using, that you can use real numbers when making that decision to close the transaction. So that would be my feedback. Emil: Cool. And then, yeah, last thing is, you know, if you're working with an agent in the area and they're going and looking at homes for you, depending on how you're buying. So one thing I like to do when I'm vetting agents is ask them if they are not like, can they walk through the property and give you at least some idea of estimation, right? Like, okay, a new floor, this much square footage, how much is that going to cost? A lot of them will actually be pretty upfront with you. They'll say I'm not really good at that, but I have a general contractor I work with who can come with me when we inspect it and look at it and do all of that. So that's kind of one thing I like to vet and ask for. Just cause again, we're relying on a team boots on the ground there. So leveraging their knowledge and experience to help us make all these estimates. All right. So we still actually have a lot more questions that we didn't get a chance to go through today that we're going to cover in a future episode, like Michael mentioned, keep submitting these questions. We'll just keep doing future AMS to tackle whatever questions you guys have. And with that, we'll catch you guys in the next episode. Tom: Happy Investing Michael: Happy Investing

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The Pros & Cons of Investing in Rental Properties with an HOA

Play Episode Listen Later Jul 9, 2020 38:12

In this episode, we have Katrina Phillips from Investor HOA Services on to explain everything investors should know about investing in properties that are a part of HOAs. --- Transcript Tom: Greetings and welcome to The Remote Real Estate Investor. On today's episode, we have one of the most knowledgeable persons I know on HOA. We have Katrina Phillips, who's the founder and CEO of investor HOA services. So are you, you are interested in investing in a property that is in an HOA. This is a great episode to listen to. All right, let's do it. Theme Song Tom: Hey, Katrina. Thank you so much for jumping on with us. Katrina: Thank you. Thank you so much for having me today. It's my favorite topic to discuss. Tom: Perfect. Well, why don't we go ahead and start, give us a little bit of a background about yourself. Katrina: So I started in the single family industry back in 2012. Prior to that, I was actually a contractor and had several properties that we bought refurbished and sold. And so I spent about 20 years in construction learning it from every aspect so that I can learn it from. And then I started working with American residential property and really develop their operating platform or was their first hire on their operations team. And people really hadn't done this in the past. The first multifamily, we were able to pull things from, but really we were writing the policies and procedures, the books and utilities and HOA were two things that people hadn't really thought about. It wasn't even a line item on people's profit and loss that they were considering in their, you know, when evaluating investments. And so we really began to build that piece of the process. How does that work? How does, you know, the fact that we own 70% of our properties are in an HOA? How do we interact with them and how does that work? So that's how I kind of got into this side of the business. Tom: Awesome. It's funny to think about 2012 and I was there too. It was the wild West where, you know, a lot of these companies such as yours and the ones that I was working at was raising a ton of money, buying these houses. And it's just kind of learning as we go and, you know, HOA and utilities, you know, came to be pretty important, parts of the details in doing this at scale. Katrina: It did. And it was so much fun. I thoroughly enjoyed every minute of it. And, uh, you know, we learned a lot and grew it, and here we are today. Tom: That's awesome. And you have since gone on to start a new company, right? Why don't you tell us a little bit about your company that you are running right now? Katrina: So I was actually sitting in a meeting and, um, we were working with a utility provider that function very similarly to what we have structured as well. We actually asked them the question of if they'd like to take on HOA as, you know, as part of their process and has it was becoming a really growing concern and issue and having some pretty significant impact on the bottom line for companies. So they said, absolutely not that they wanted to stick with what they specialize in and that really planted that seed for me. And so that's where investor HOA services came into play, where, you know, we took a singular focus to build an operations platform around that that also integrates pretty seamlessly with other companies, systems and process. I knew I couldn't go in and say, throw away what you're working on right now and use what I'm saying to use. I also knew that we had to get it so that people could kind of go to one place to access information and things that they needed to manage the property. And so that's what we began developing back in 2017 is really an operations platform that can be used in several other areas. We just chose to focus on HOA because we could see it with a growing concern, making bigger and bigger impacts to the bottom line of companies. So we focused in there first, so that is investor HOA services. Tom: That's awesome. So to sort of paraphrase investor HOA services is a provider for investors to manage basically all things related to the hos for the properties that are located at those hos. Is that right? Is that a good summary? Katrina: That's correct. So everything related in the full life cycle of compliance, which could be a city code, HOA, rental, registration, municipal permitting, and all of those kinds of things on the compliance side of property management. Tom: Very cool. Very cool. Awesome. Well, let's go ahead and dig into some of the meat of this learning a little bit more about H ways and how they relate to investors who are evaluating. So why don't we take a step back and why don't you define what is an HOA and, you know, high level, what are they Katrina: So HOAs can be actually kind of several different things. And of course there's no consistency across the country of what an HOA physically is, but in general, in HOA is a nonprofit company that manages common areas, common elements within the community amenities. And there's also of course, condo owner associations, there's civic associations that are often voluntary membership, and we're starting to see more and more different types of HOAs, such as a borough and a neighborhood developments. Of course, in Florida, you actually see a lot of community development districts. There's some really fun, fancy development districts in Florida that have waterslides and water parks and all kinds of fun things in those. And so to be a member or participate and utilize those amenities items, then you pay your assessments fee on an, you know, either quarterly or annual or semiannual basis. And the HOA then kind of takes care of all those common area elements. Tom: Got it. And that's interesting about some of the, those new amenities that are poking up around water slides. I mean, he made it sound it optional at all to join the HOA, or is it like, you know, since your property's located there, or is it kind of built into the deed that you have to join the HOA? I'm curious about that. Katrina: Yeah. Civic associations are voluntary. Often they'll have a community pool or something that is shared amenity there or a park or something along those lines. We'll see a lot of lakes and that kind of thing within a civic. So that's voluntary. You also have something called a club membership, which will be, you can pay for different levels of membership within that. So for example, most often they include a golf course. You know, they might include a workout facility that's extra above and beyond what a standard membership would be. And so those are voluntary in regards to what the levels are that you can buy into. But in general, yes, if you're in an HOA, just kind of a standard HOA, then you are required to participate in their program. Michael: And it sounds like there's kind of numerous different styles of HOA. I know for me, when I hear HOA, I just automatically think of condo association, but what you're telling us is that they could apply to single family homes, town homes, you know, planned communities. Is that fair to say, Katrina: Yes, they can be commercials, commercial spaces. There's just all kinds of different options out there. Michael: Interesting. Got it. Katrina: There's probably about 10 that are standard that we see standard across the board. And then in different parts of the country, you see kind of different nuances within that. Like I said, you'll see boroughs, of course, in New York and New Jersey, that's a little, you know, structured similarly to a civic or community development, but they all have a little bit of different nuances to them. Michael: Okay. Interesting. And you touched on amenities a little bit, and I was curious if there is such a thing as kind of a common or a standard set of amenities that you get as being part of an HOA, or do they vary as drastic as the style of HOA that there could even be out there? Katrina: They vary very drastically. So we have especially see this a lot in Georgia where maybe it was built in the eighties, especially, well, pretty much any community built within the 1970s and eighties when HOAs first kind of started coming on the scene, they are just more of a planned community. So you'll see the coldest actual see similarities in regards to finishes on the exterior and, you know, mailbox requirements and that kind of thing. And then it's kind of more where it evolves as time went on. And that's where you kind of see some standardization on what I guess they were into in that moment. So then you hit into the two thousands and, and then now into the late two or 2020 range, and you're seeing these, you know, fun things like that are going on in Florida. So really it varies pretty tremendously. And that's a big part of what we do is we look at okay, what amenities are available, where that assessment money going to, and what's the benefit you're receiving from that. Tom: That's interesting. I never thought about it that way about, you know, the vintage of the property. Like what was the fad for developments in the way that they structure these communities? So depending on what year you bought it, it is kind of a different flavor of the way that they were structuring. Super interesting. So I got a question. So if you put your investor goggles on and just think this is very high level about evaluating a property with an HOA, what would you say generally speaking, like what are the good things about buying a rental property that's in an HOA and what would be some of the detractors of buying a property in investment property? That's at an HOA. So we'll start with the positive. Katrina: Yeah, let's start with the positive. So one of the things we learned and identified very early on is here, we are an investment firm and we're based out of Scottsdale Arizona. And our house is in Georgia and the HOA begins to function as kind of your eyes and ears and helping you monitor and keep an eye on that property. So I think as an investor, that's a huge value to you. You don't have to actually have people on the ground, you know, checking that property, the HOA is doing that for you. So I think that's probably the biggest positive as well as from a leasing perspective, of course, you know, you're leasing a property that has most likely some upgraded amenities and features that are desirable to people leasing. So, you know, it assist with that, it making it a home to that person occupying that property, not just a rental, they feel like they're part of a community and part of a home on the flip side of that, that can actually, that community sense is something that the HOA have expressed that they're concerned about when institutional investors come into their community, will there be that loss of sense of community because it's a renter there and they're not going to actually participate in the HOA itself. So that can be a con I think one of the other issues that has occurred over the last several years and kind of my number one thing that I focus on is rebuilding communication bridges, because what happened was when institutional investors came into communities, the HOA did it kind of feared that and was a little concerned that the property values would degrade and there would be issues. So one of the things that has been, I guess, a missed out by the industry is that they didn't work to keep those communications open with the HOA and the HOA began to grow very frustrated. So what they've done out of their frustration is began to really Institute some rental restrictions to either prohibit institutional investment in that community, or really eliminate it and control it. So that's been kind of the, the other side of it that's evolved since 2012, when we first got into the industry, they were happy and they were excited about us coming into the communities. We were remodeling the property and making things better. And then that slowly started to shift in 2013 and 14, where they began to grow skeptical. So there's been a lot of work to alleviate that situation, but there's still some work to do there. So that's kind of the flip side of it, where the HOA is, are frustrated and they're kind of lashing out in these different ways to really essentially get some people's attention and get things cured. And together, Michael: You touched on it a little bit ago, Katrina, but I wanted to circle back to it for my own edification. We said that HOA is our nonprofit businesses, who is the HOA when we talk about HOAs. Katrina: So the HOA for the most part is a voluntary board of directors of owners within that community. So I we're seeing fewer and fewer of those, maybe it's because most HOA has gone out and decided to have a management company come in, such as associate or for service residential and come in and manage that. So the HOA is just meant to collect dues, cover the expenses of maintaining those common elements. And then that's pretty much it, that's all their job that's there. And then of course, to ensure that people adhere to the CC&Rs for that community and, you know, don't let their grass get to leave their garbage cans out, all that fun stuff. Michael : Okay. And so when you talk about the HOA members or board being frustrated with institutional investors coming in and looking to crack down on that a little bit, that's just a group of owners in that specific community that are feeling that way and expressing those frustrations? Katrina: Correct. Michael: Got it. Tom: Gosh, I love your point about, on the good side of thinking of as another eyes and ears. I think a lot of times, you know, we ask these questions, I kind of have an idea of which direction, you know, we're going to get a response, but I never thought about that way of thinking of the HOA as, as kind of part of your team love that. So you touched into a great transition point CC&Rs and, you know, making owners out here, what are some of the recourse that the HOA companies have and with owners that are not adhering, and I'd love for you to get into that and CC&Rs and rules around that. Michael: And Katrina for those of our listeners that might not be aware, familiar, what does CC&R stand for? Katrina: Covenants codes and restrictions? So it of course varies by state. Each state has some extra nuances. You know, Florida has some really interesting ones, New York, New Jersey as well. So the CCNR are put into place and in those CC and RS, it's really spelled out what the recourse is. We have some, we've had some interesting updates over the last several years in regards to what the HOA can charge you because previous to this, and it kind of started in an Arizona, which is where most HOA has, you know, kind of evolved from. But the previous to this legislation that came through the HOA, kind of do whatever they wanted in regards to getting your attention and having you pay fee. So we're seeing over the last five years or so where they're really standardizing that across the country, which is wonderful. We like standardization. And so they're making it so that they have to go through a very specific process to notify you of that violation, give you a period of time to cure. If you don't cure, then it goes to the next step. And so usually it's a courtesy warning, one, two, and three, then by warning three are incurring a fine, and those generally start at $25. But in a lot of States, we also have, what's called a stair set process, which is another thing that investors, there's a way to work around this or work with the HOA to do what we call the clean slate program. So the HOA in some States, the fines violations and assessment costs falls the property, not the owner. So you have a new tenant move into that property. And the prior tenant kept violating with trash cans being sent out. And that violation was then go into a monitor status from anywhere from six months to one year. And if they re-violate within that timeframe, it, it goes right back to where it left off. So if you were at already at $75 in fines, it'll go to a hundred or it'll go to a hearing. So that's something that investors aren't aware of, but you can work with the HOA to, again, wipe that slate. Clean, say, we've had a new occupant in it. We're a new owner. We're going to do things differently now. And we promise you that we won't have those violations incurred. So like I said, it's been really interesting to see over the last several years where they've kind of standardized that with the HOA is, can do kinda maintaining some control. And that has to be documented in their CC and RS, what their fee schedules are now, which really helps you kind of plan for that and be prepared for what's going to come your way. Tom: So what are the more common? So talking about, you know, people, you mentioned putting trash cans out, what are the other kinds of issues where people incur fines from HOA, those would be all in those CC&Rs and what are the common issues that you think most investors deal with or violate? Katrina: So the number one thing, and we track this, we look at it, we break down and give a lot of granularity to the types of violations that are coming in. And number one on the list is always landscaping and specifically weeds, especially in April and October, when they're doing those inspections on that, and you can get almost weekly fines for that or notices of fine. So landscaping is number one, and I would say two is two and three are usually pretty close and it's trash cans and parking violation. So we have a lot of residents to try to park on the lawn, try to park, you know, on the street when street parking is not allowed. Michael: I own a property in an HOA and I get nasty grams all the time. Trash cans are still out. It's been a week. I don't think God, God, God, I got to get ahold of the tenants and pass the message along. Tom: Did you say nasty, nasty grams? Is that the nastygram? Michael: Exactly, but a letter informing me of a violation, I call the nastygrams. Tom: So how about when you do have some issue, can you guys push that to the tenants that are living at the property, if they're violating these rules? Like, are there any laws or registrations like around that? Like if they violate an HOA rule, should it be the tenant that has to pay it or fix it, or I'd love to hear your thoughts on that. Katrina: Yes, indeed. So what we call that the tenant charge back process. So we actually have a whole workflow that goes through, we've received a courtesy notice. It gets sent to the tenant. The tenant actually, um, for most of our clients has about seven business days to return photos to us and make sure it's care. We're trying to really alleviate that even courtesy notice from going any further than that is we're trying to alleviate aggravation that the HOA is feeling about institutional investors. So we really work on the front end, as well as tenant education to let them know you live in a HOA, here's the rules and regulations that you need to be aware of. And most of the hos are now taking their several hundred page CC&R document and really narrowing it down to the top things to be aware of. So we make sure that that is available at the fingertips of the leasing team so that they can educate the tenant. We find we have a much better experience with them. And so that all gets documented so that we can see very clearly, okay, is this an HOA issue or a resonant issue? The resident keeps leaving their trash can out every week. And now it's a thousand dollars in fines because they've been incurring daily fines, which always just makes me cringe because a thousand dollars just for leaving your trash can out, we see it all the time, but it's unfortunate to say the least. So there is a whole system and process where we educate the tenant. We notify the tenant every time we receive documentation and really keep them in the loop and engaged and involved with being part of that solution there versus, you know, ongoing continual issues. And then we also work with the leasing team so that they're aware of, Hey, I think you may need to have a conversation with us, this occupant here and see if you can alleviate that. And then the third piece of that is of course, communication directly with the HOA is to let them know we have informed the resonant. We have received these photos. Do you consider this violation cured and closed? That's then the issue that I've spoken to, a lot of, of the SFR groups out there where they have that $8,000 mailbox, because they sent out a contractor to fix the mailbox post, but they didn't fix it according to what the HOA was looking for. So we make sure we really communicate with the HOA and let them know what the care was and how it was fixed and make sure that they're good to go with that. And then if they, if there is a fine, we establish with our clients a list of what will be a charge back versus not. So for example, a trainees trend and it's above seven feet where it needs to trend. Most of our clients don't want their residents getting on a ladder. So they'll not charge that back. But if they do, if it's under the seven foot mark, then, and there is a fine incurred, then that gets put onto the tenant ledger to hold them accountable for that. Tom: Got it. Jump just the other kind of aspect of the CC&Rs and the rules, not necessarily fines, but you know, percentage of the units that can be rented. So there's some other really important aspects of those rules that an investor would need to know that's in those CC&R. Do you mind touching on some of those, Katrina: Right. So we complete a review of all CC and RS that come into us and we're looking for a rental or leasing restrictions. We're also looking for sign restrictions. And other thing that people don't often think about is that certain hos don't allow you to put a sign for lease sign in the front yard, or they don't allow, you know, you can put it in the window, but you can't put it anywhere else, or it has to be a certain size. So we'll look through that, the CCNRs to identify any of those kinds of issues. And then the rental restrictions kind of break down into three categories, either have category one where they just do not allow leasing in their community. And we will recommend that you dispose that property or they'll have the second category. Is there some kind of restrictions where they require a background check and approval of your resident before they move in, or there's a cap in place of 10%? Usually there are things that you can work through on those rental caps, they're called hardship letters. And you can put in a hardship letter to that HOA requesting them to review and make an exception to that 10% cap. And then there's also in that category where you can't lease the property for anywhere from 12 to 24 months, it has to be owner occupied. So we then document that information in our systems so that you can see the breakout of that. And then they use third category is they just want a copy of the lease and to know who's renting the properties basically. So those documents are captured and sent over to the HOA, Michael: Shifting gears here a little bit Katrina, I want to talk about HOA fees because you mentioned at the beginning that are nonprofit bodies or organizations. If you will. I feel like me personally, sometimes that they might be for profit, but so what are the fees usually go towards paying? Katrina: So the piece should be going towards paying for those common area. Upkeep. There should be a capital reserve account noted on their budget. They should be issuing the budget to you on an annual basis and it should be reviewed and make sure that there, the other concern that I know a lot of investors have expressed is we keep paying these assessments, but the money is not going to what we've been paying into. And the HOA is virtually insolvent. So they're carrying a negative balance. They have some sort of debt again and against the HOA something's going on in their financial stability is in question. So that is what the money is supposed to be going to. And as well as management of that HOA collecting the assessment funds, paying for an inspector to go on and stacks for fines and violations and those kinds of things, that's where the budget should be going. And like I said, they should have a healthy capital reserve accounts to complete any upgrades that are needed to that age away. Michael: Okay. And so you bring up a great point about upgrades. Would upgrades be a reason for an HOA fee increasing from year to year? Tom: Yeah. Do they change? Yeah. I'd be interested to hear your feedback. Katrina: They do. And you know, 2020 has been interesting for several different reasons. But one thing we're seeing from the actual AEs is a lot of special assessments that are hitting people's accounts. And I have to say, this is the first year I've seen where so many are being instituted and put into place. And so there's actually two levels to that where they don't even have to have a board meeting to vote in a special assessment, depending on what the cap is of that, that amount. So that it could literally just show up on your doorstep one day that you have a $20,000 assessment do so generally speaking in a normal year, we'll see about anywhere from a three to 5% increase of assessments year over year. So several years ago when we started the company in 2017, we've actually seen quite a bit of increases over the last three years. And I think that's HOA is trying to make up for some of the depositions and things that they have in their capital reserve accounts. So what we're normally would see would be a three to 5% increase, but since 2017, we've seen average across the country of assessment dues go from three 30 to 440. So it's quite a good jump, healthy jump over the last few years, but know normal would be three to 5% where, you know, just cost of things have gone up. So cost of their power bills for the common areas. And those kinds of things have gotten a little bit more expensive. So, you know, on average, I would say anywhere from a $5 increase to about $25 would be pretty normal. Anything above that, then I'm starting to look at the budget and kind of see where that money is going. What's going on. Michael: And you mentioned special assessment. Can you talk a little bit about that? What that is? Katrina: So it's more common of course, in the condo world and the townhome world. Uh, but a lot of our SFR investors have condos and town halls and things like that. So that would be to replace a roof on ability repaint the exterior in a standard single family development. It would be to put a new roof on the clubhouse, replaster the pool, those kinds of things, where they should be putting aside a capital reserve fund. But what we've seen is, you know, with the change in the economy in 2008, 2009, I think a lot of hos did, you know, ended up dipping into that reserve fund to keep going and keep solvent. And so now they're kind of trying to make up for that. And so we're just seeing a lot more this year than we have in the past. It could also be to do with the average age. And most of our clients' portfolios are just kind of hitting that Mark where they're starting to need some major items completed. Michael: Okay. And is there a good ballpark or kind of range or estimate you would anticipate based on size or age of an association or community for how much reserve they should have? The reason I asked the question is I live my primary. Isn't an HOA. I have a condo and there was, I got, there was a study done that showed the financial stability of the association and it showed that they were way under-funded, but they had several hundred thousand in cash in reserve. And so I said, well, that seems like a lot, but I have no idea how much they should be. This, this company thought they were underfunded, but I feel like they're adequately funded. Is there a good ballpark or general rule for that? Katrina: No, because there's just so many factors that go into place there, you know, have they managed their funds over the last several years? I would say that HOA is probably managing pretty well with a couple of hundred thousand in there. I've literally seen some with nothing in their capital reserve budget. So I think as our housing inventory ages, uh, you know, it is just becoming more and more of an issue, but yeah, I don't think there's a standard number you guys can count on to tell your investors that, you know, set aside this much because you may, you know, have this come up at some point. It really varies wildly. Tom: If you're buying properties within an HOA, is there a way for you to get on the HOA, like a seat or, you know, if you get enough properties or I don't know, I'd be curious to hear your experience. If you can't beat them join, that's not the right way to say it. If yoou can't beat em, join em, but like basically getting on the inside, I would imagine like having multiple customers, like it's probably pretty big sway potentially within certain hos. Katrina: Yes, definitely. Especially with institutional investors, you could potentially own 30% or more of a community. So some have instituted in their CCNRs where even if you own several properties, you're still only get one vote, um, board items, but for the most part, yes, it definitely can help sway those voting items. I actually, one of the questions you guys had further down here was have I been on a board and, or joined a board of the company that I worked with previously? And yes, I was on a board in North Carolina and attended several board meetings. What we had done was we were doing a build to rent a pilot projects at the time. And so we were going in and doing infill in a community that was already established a really nice HOA. We did the same thing in Georgia as well. And we actually attended several of the board meetings just to say, this is who we are, what we're about. These are our goals as a company and what our know kind of core values as a company are. We're not just a nameless faceless corporation where, you know, people that really care about your community. And so it actually really, really helped. It was very, you know, contentious at first, they weren't really excited about us being there, but we were able to really turn that around and then, you know, create a really good relationship with that HOA in the longterm. So there is definitely benefits if they can get some notes, your company and the people at your company, you know, they don't sign you or, you know, put violations on unless you've broken the rules. But I feel that it goes a long ways to kind of alleviate how often they're going to, you know, hit you with those kinds of things, if they know who you are. And, and then instead of doing a formal final email you directly before they even document that, so you can go in and get it taken care of and never even hit your account. So that was a lot of fun, but it had some pretty tremendous impact. And then we've been a member of a few different boards throughout the country and, you know, same kind of thing where you identify an HOA that seems to be a, maybe elevated in their feelings about your company and whatnot. And you want to, you know, stay in that community and not sell out of it and continue to lease your properties there. I think it's always a great idea to participate in board meetings and discussions with the HOA, because again, remember their biggest issue and concern was that they would lose the sense of community than an HOA brains because it's, you know, it's a corporation coming in and investing in here. So if you can kind of guide them to a different philosophy on that, it has a pretty tremendous impact. Yeah. Michael: That makes a lot of sense. Makes a lot of sense. Katrina, can you talk to us a little bit about the value that you've seen in your experience from a rental perspective and then maybe from a sale perspective as well that a well run HOA can bring to an investor? Of course the poorly run ones might harm the value, but as far as rentability and resell value for an HOA property, how have you seen that impact things? Katrina: It's definitely positive on both ends of it, right? Because you've got the tenant who now has access to a pool and other things that, you know, if they were to purchase a home, they maybe wouldn't have access to those same things. So by renting, they have that added benefit. And on the South side, you know, I haven't seen data on exact numbers of, you know, increases the value by say $5,000 because of course, then you're paying dues and stuff in there. And I haven't seen any data pull to see how it impacts the sale, but, you know, I definitely know, well run H ways you'll see them move a lot faster. We'll sell that home much faster. People are clamoring to get into that community and be a part of it. So, you know, especially like those really fun ones in Florida, you know, they almost have a wait list of people trying to purchase homes in there cause they want to be there. Michael: The water park in the backyard makes sense. Katrina: Yeah. I mean, how great is that? So, you know, it definitely impacts leasing, you know, several years ago, stock saw statistics that it definitely on average knocks several days off of the lease up timeframe. So it does seem to help. Michael: Interesting. Okay, great. Tom: Awesome. My last question I have right now, and this is, I guess, sort of an aggregation, probably of some of the topics that we've talked about, but just at a high level, if you're talking to a newish investor, who's thinking about buying a property, that's in an NHOA, what advice would you give them on how to go about evaluating and owning a property in an HOA? Katrina: I think they should definitely, and most people don't do this. I think one thing they should look at is is it, if this HOA is financially solvent and how is it being run because you're right. If that HOA is not being run well, it will certainly have an impact on your resident experience in that home. The very quickly start to feel like, you know, they're being picked on and you know, that's not the resident experience that any of us want. So, you know, as an investor looking at an HOA, I would definitely take a look at that. What does this HOA look like? Are they keeping up with things, are the common elements and go to order in good shape? Are they easily accessible? You know, is it kind of making sense? What if they're charging $300 a year? Can I see where that money is going essentially? So I think visually kind of inspecting the community would be really helpful. And, you know, in evaluating that decision to lease there or not, Tom: How would one get the financials related to an HOA? Katrina: So in when they're purchasing home, they should be asking for an estoppel. And in that estoppel gives you your statements, your CC&Rs, and ours, all of your documents that you would need. And I think also, like I said, I've spoken about tenant education before, but it's so critical again to the whole kind of overall experience and whether or not you're going to keep that tenant in that home longterm. And of course that's a goal for most SFRs is really going to keep them in the house, you know, two, three, five years. And so, you know, by obtaining that estoppel, now that becomes challenging when you're purchasing via auction or other avenues. But if you're purchasing through MLS and through I'm sure groups like yours, where you can have some of that documentation in place, then I would encourage everybody to go in and take a look at that because it definitely will have an impact to kind of the longterm viability of that investment. Tom: Great communication. Well, thank you so much for coming on. This has been super interesting, you know, hos there's so much value in having that kind of preset neighborhood look and feel that is desirable and a good standardization. And I love the feedback about getting to know the HOA and partnering with them on your team has been super helpful. And I want to thank you for coming on. Katrina: Yes, I've really enjoyed it. Thank you guys. Tom: Awesome. Michael: All right, thanks. Have a great one. Tom: Thank you to Katrina Phillips for today's episode, super knowledgeable. It got a lot out of that. If you liked today's episode, please subscribe to us on your podcast. Send us a note. My email is tom@roofstock.com. I love to talk investing. I love to talk podcast content. I love to talk investing education hit me up. This episode was brought to you by Roofstock Academy. Roofstock Academy is a holistic program with one on one, coaching group coaching, over 50 hours of on-demand lectures covering getting started to scaling up. A special bonus Roofstock Academy is now giving $2,500 towards Roofstock marketplace credits. That's right. You can pay $1,250 for $2,500 of marketplace credits. All right. Happy investing. Theme song

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Help! People Think I'm Crazy for Investing in Real Estate… What Should I Tell Them?

Play Episode Listen Later Jul 7, 2020 39:23

In this episode, Micheal, Tom and Emil take on some common worries that friends and family have when you tell them that you are considering taking up remote real estate investing and provide solid arguments for reasoned responses. --- Transcript Michael: Hey, everyone. Welcome to another episode of their motor real estate investor. I'm Michael album, and today as usual, I'm joined by Tom Schneider and Emil Shour. In today's episode, we're going to be talking about kind of an interesting topic. Do those around you, not support your remote real estate investing dreams. We're going to be giving everyone today some tips, tricks, and fodder about how to speak intelligently about remote real estate investing. So let's jump into it. Theme Song Michael: Alright guys, before we get into this episode, I just wanted to check in with you all, how are you guys doing? There's some new quarantine issues that just came out from the governor and wanted to check in how you guys are doing. Emil: Welp. Can't go surfing this weekend because LA beaches are locked down. Michael: Oh no! Emil: So that's unfortunate, but I got out there this morning in anticipation of not being able to, Michael: How was it ? Emil: It was crowded a little bit slow, but it was fun. You know? It's good. Anytime you start the day out on the water. Michael: Yeah, absolutely. Tom: Is a bad day on the surf. Better than a good day, not on the surf guys. Michael: Yes! Emil: Of course. Michael would say yes, because he's the eternal optimist, I would say. Yes. There's times. I get really frustrated. Sometimes I get out of the water and I'm like, damn it. And I'm just like huffing and puffing on my way to my car and just like, but yes, in hindsight, it's always like, at least I got out on the water and did something fun Michael: Without being too cliche. I think every time I get into the water, I'm able to think about stuff and I go in with problems and come up with solutions. Even if it's not a great day, it's way more fun. If it is a great day, given the choice between the two, I would absolutely choose better day, but I don't think I've ever had a bad day out in the water Emil: Hashtag no bad days. Michael: That's right. Tom: What I've been doing lately is our community pool… I live in this neighborhood that used to be part of an HOA and there are still some of the HOA amenities, but now it's just like people have the option to join. And I joined cause it's like a really cool feature, but they have really, they need a monitor at the pool just to make sure that people are not bringing in guests and they limit the number of people and a bunch of other County related restrictions. But anyways, so I've been doing that and I've been working from down there. There's really good wifi. I'm out in the sunshine. I've been having some of my meetings with my background, with Emil, Michael and Pierre, where there's like, you know, a pool in the background and every, you know, couple of hours instead of going on a walk, I'll do a Cannonball and a that's the latest little update. And it's been a really, I don't know, I think there's something about being outside and being creative and that feeds into that. So that's been my, my new thing work from pool. Michael: I'm curious to know what the HOA, you know, if they just everyone mutinied like, no more HOA! Tom: Right. I think it fell apart. I think in like the seventies or eighties, I gotta, I gotta get to the bottom of it, but uh, yeah, really just random, big pool. Um, I don't know. Yeah. It's cool. Michael: Killer. That's awesome. Emil: How about you, Michael? What's new in your world? Michael: Um, not a whole lot. I've been staying up quarantining at the in-laws and just kind of hanging out in here. It's been hot as ever like the surface of the sun. They lived just outside Sacramento, so it gets really, really hot up here, but we've been playing a lot of tennis, which has been really nice, cause there's nobody on the tennis courts. Cause it's so hot. And I think people drive by and like what a bunch of schmucks, like who's playing tennis, it's a hundred degrees outside. So it's, it's been a lot of fun to just get out and sweat and be outside. Emil: Nice man. Tom: Pierre with so many hobbies. I'd love to hear. I think you might mentioned getting in some woodworking again. Pierre: Yeah. Yeah. I moved into a new place in Alameda and needed some furniture to fit my record collection in this little nook that we have. So I built like a little mid century modern table with some cubbies, for my records and a rack to hang my guitars. Tom: That's a fantastic quarantine hobby and practical! Emil: I give up, Pierre's just the coolest out of all of us. Let's just, Michael: Oh, it's not even, yeah, it's not even close. Pierre: Now. I got the edge though. I want to build all my furniture. We were looking at buying some online but now it's not seeming as attractive. Michael: You can build a better. Tom: I love it. Emil: Awesome. And for anyone who's new to the show, wondering who that voice was. That is our producer Pierre. Michael: All right, guys. So I want to break down some of the very common aversions to remote real estate investing and then talk through some of the counterpoints to each of those. I think any real estate investor at some point in their investing career has likely come up against some aversion or caught some flack. So I want to talk about the first one that I think might be one of the most common ones. And that is how could I possibly ever invest in real estate remotely? I don't know anybody in inter X market here. Tom, do you want to take a shot at this one? And then, you know how you would respond to someone who's throwing this at you? Tom: Yeah, totally. And what a relevant first topic for the remote real estate investor. So I think a common misconception about real estate investing is that it, you are a lone wolf in and out doing on your own. And that is so far from the truth, especially, uh, as a remote investor. So what I would say for this is you should invest as a lot of time in building your team just because you are not in the region, you're specifically your local property manager. That's really going to be a key key point of being able to do this remotely. So a way to, you know, go about that is have a very thorough vetting process of identifying, sourcing and vetting your local property manager. And one of the great things that Roofstock does is when we open a market, what we'll do is we'll find from word of mouth and looking it up online, the top 20 local property managers. And from there we'll do phone interviews. And from there, we'll cut more down to where we have about five of them. And then we'll go into the office and visit them, get their standard operating procedures, get their, a copy of their lease that they use, get all of these different and then say, okay, yup. These are good guys that we would recommend. Now me as an investor, if there's a company that's doing that, that's great. That gives me a head start, but I will still take the time to vet them myself. One of the aspects we have within Roofstock Academy is some pretty thorough interview templates for talking to property managers and identifying good ones. But to combat that is you have a really thorough process of building your team local there on the ground. So, you know, once you have identified that property manager that is going to be your remote eyes and ears is really not that different than doing any kind of local investing. Once you have that trusting partner Michael: And Tom breaking down that big rock into an even smaller bite sized rock, how do you go about finding these people? If you're not investing through Roofstock and they are not doing it for you, what's the actionable step that people can go take to go meet or start talking to these folks. Tom: I always put an extra points on referral from people that I trust and know. So I'd say if you can get referrals that way from either lenders or other investors, you know, that's a great place to start, but you should expect what you inspect. So you need to go in and expect it in, inspect it to now that is a mouthful. Michael: That's a tough one to say. Tom: Yeah, yeah. We use that saying a bunch of our, the last company that I worked at, but the gist is if you don't do the work to verify, you should expect that it's not going to be that awesome. So you need to put in a little bit of the work of talking to these partners. So I digress a little, I guess let's see. I'm going back to your question. What was your question? Michael: It was how can someone go find these people? Tom: How can they find people? So, okay. References number one, number two, don't shy away from looking on the internet of just searching the city of who are the major property managers. And you know, this, isn't making the decision on who you're picking. This is just building that initial list to widdle down with conversations on the phone and potentially in house visits to make sure that it's all buttoned up and such. But I'd say again, your greatest resource would be getting referrals. Bigger pockets, I think on their forums have some references of some potential local property managers, but I would definitely expect what you inspect. So make a point of doing that. Like work. Emil: One of the thing, I want to point out with this one, cause I remember getting this one a lot. When I first started investing, you know, people would be like, you're going to invest where across the country, like that's insane. What if something happens to the property? What if it gets vandalized? What if this and that? And the thing is, is those things happen, whether you're local or you're investing remotely, right? It's not like if you live 15 minutes away from the property, things aren't going to happen. Things are still going to come up no matter where you invest again, it's just making sure you have a partner. And that's why we keep talking about this property manager. Who's invested, who cares and who is a good member of your team. That's one of the big things we're going to be talking about is, you know, you hear a lot of real estate investors say you have to build a team. This is a team thing, especially if you're investing remotely. So that's the big thing is things will still happen. It's just a matter of getting the right partners to help you handle all these things. Michael: You guys nailed it. I have nothing to add. The one thing I would add is that it really forces you, which I see it as a pro. Some people might see it as a con, but it forces you to get really good at time management. Because then they'll just like you said, stuff's going to happen. Whether it's next door or whether it's across the country. So if it's across the country, you've got to rely on people to take care of that. You've got to have set the systems up and placed on, like you were saying, to be able to have that dealt with without you needing to become involved. So if it's next door, you're going to be tempted to go fix it yourself or go deal with it yourself. But if it's across country, you physically can't. So being really good at time management and task delegation is I see it as a big pro. Tom: I guess one last thing I'll say is, you know, ideally the home that you own and you're renting out is close to you, but there are so many benefits to investing remotely. Like you have access to so many more properties, so many different types of returns, such different like economies, like that makes it a little bit of barrier to entry is doing that extra homework of finding that great partner. So for me, being able to access these cash, flowing properties all over the US that extra work of finding the good property manager and then vetting them and building that relationship is worth it. Michael: Yeah. And to that point, I mean, what's the alternative here, not investing or not investing remotely. And if you're in a really expensive market, you might not ever be able to break through. So if it's invest remotely and learn a bunch of stuff or not, I'd say you can't afford to not learn how to do some of this stuff. Tom: Word. Michael: Okay. So let's move on to the next one. Uh, so many times I hear people say this, I know someone who tried to investing in real estate and they would take these midnight calls, fixed toilets. I don't want to do that. Why would you ever want to do that? Emil, you wanna run with this one? Emil: Yes. So this is another common one, right? So people say, okay, I get why you want to invest remotely, but are you going to handle fixes? What if someone calls you? And again, this goes back to what we were just talking about. It's this is why you hire third party, property manager, again, building the team, right? I would say the property manager is one of the most important pieces of your team. And the thing here is I don't know how to fix most problems, right? I would call a handyman or whatever anyway. Right? So the property manager is just, they're just your barrier. They're taking in those calls and they're finding a local specialist. Again, you're not going to be good at everything in your business. What you want to do is hire the professionals who are in the property. Management is the best that operating your property. I would probably do a much worse job and I'd spend way more time than a property manager who does this for a living. So the rebuttal to that question is while I'm going to hire a third party property manager, who's an expert in the area. Who's going to manage it for me. And in return, they take a certain percentage of my rent each month. The other thing is the important thing here is this frees up a lot of your time, right? If you're constantly dealing with your operational stuff, you're not going to be thinking about how can I grow this? How can I scale it? A lot of us who are doing this, we have full time jobs, right? Like instead of fixing things on the weekend, I could be thinking about how can I start a side gig, earn more money or whatever. So I can go buy more properties, which I would argue is more important than handling the day to day stuff. Michael: It's so interesting. I think people in the day to day world in life can really wrap their head around hiring professionals to do things, right. Nobody says, I'm not going to go buy a car because I don't know how to fix it. No, we all take it to the mechanic. I think it's the same thing with real estate and with investing where people are. So whatever reason can't get their head around that you might not have to do that, that kind of stuff. There are professionals that will take care of it for you. Tom: Right. It's such a great point. I, I love that, your, uh, isms, Michael isms. I think we'll say, I think in talking to a lot of people who are interested in investing in real estate locally, they're like, yeah, then I can go and I can run out and paint the house when, or do these things that happened. It's like, no, you don't have to do that. And you know, we were talking about these costs that you incur with either repairs or maintenance or paying your property manager, but those are good costs to pay. And also at the end of the day, it's going to help you on your tax basis. It, you know, there's just so many tailwinds in doing this. Emil: One last thing I want to add here is you can always later down the road, maybe you're ready to retire, right? Maybe you have X amount of properties. You have enough cashflow coming in. You want to retire. Maybe at that point, you feel confident enough where you do want to self manage. If you go back to episode five that we did with Chris Bennett, he talks about how he self his properties from thousands of miles away. I personally probably won't get to that point. I'd rather let somebody else deal with it. But it's always one of those things where I think you can even just observe your property manager for years, learn how they kind of run everything. And then if you want to down the road, you can switch back or switch to self managing. If that's interesting to you. Michael: Funny, I think the longer I invest, the less I want new self-manage. I realize how much goes into like yeah, no way. Emil: Yeah, same. I had somebody who I was talking about. Who's looking to buy a property on Roofstock and they were asking me the same thing. It's like, should I self man? He's like, I'm actually thinking about self managing first, just to like, get an idea of how all these things work and then handing it over a property manager. And I was like, if anything, I would do the complete reverse for all the reasons I just mentioned. Like, dude, you're brand new. Don't don't do it. It's going to be a nightmare. And you're never going to want to invest in another property again. Promise Tom: That's the Emil Shour guarantee. Michael: Awesome. Okay. So the next one I want to touch on is something I'm sure we've all heard a lot about, and it's that real estate is such a risky investment. Look at what happened in 2008. And so I'll take this one. If you guys don't mind, you know, my response is you're spot on don't invest. No, just kidding. I would say, you know, 2008 was the direct result of poor lending practices and those have definitely since changed. And so I don't anticipate seeing a financial disaster as a direct result of poor lending practices again. Don't misinterpret that as me having a crystal ball, that's just my personal opinion and be very may well see a financial disaster from other, but the poor lending practices seems to have gotten cinched up pretty tight. So I would actually argue that real estate is often a safer investment than the stock or the bond market. And I think so often people say, okay, real estate is risky, but these other things aren't, there is also people that say real estate is risky, put your money in the bank. And to that, there's all kinds of counter arguments and counterpoints that are all based in fact about inflation and how you actually lose money. If it's just sitting in the bank, if you're not earning at least the inflation return, but so in looking at growth, the comparison to simply stocks, bonds, and real estate. So with real estate, there's just such a higher degree of control. The tax benefits and potential returns are typically going to be better than your average year in the stock market. I think it's pretty well accepted that stock market returns average between six to 8% in any given year real estate, you can do significantly better with that from a pure cash on cash return perspective that doesn't even account for the tax benefits associated with it, as well as the appreciation and loan pay-down equity that you're essentially buying into your property. So I personally I'm drinking the Koolaid. I think there are tons and tons and tons of facts and figures that you can throw at someone that's saying, Oh, it's such a risky investment. My guess is that they probably haven't invested in real estate. And if they have, they aren't looking to do the same type of thing you're doing remote investing with a property manager. So I just want to make sure that everyone's comparing apples to apples. Whenever they're hit with something like this, you really want to understand what's being talked about. Tom: That's great and a good overview of like all the benefits of why, at least in our opinion, like the benefits outweigh the rewards. And what I love about drinking the Koolaid is there's so many different flavors of the Koolaid. So I kind of switch off on which one I'm most excited about. So the tax advantages is great. The immediate cashflow is great. The appreciation is incredible, but the Koolaid I've been sipping a little bit more of is the loan pay-down aspect. And it's just crazy. You can borrow like a hundred thousand dollars and someone else will pay it off for you. Like, I don't know, like wording it that way is really kind of mind boggling of how incredible investing is. So even if you're not cash flowing, say your cashflow is zero, but you still have a loan on the property. And you're not paying that loan. The person who was renting the property has paint alone. It's like obscene right property after you get a free property. So anyways, just kind of in your, going through your ran, I was just thinking of what is currently spinning through my mind a little bit heavier on like, wow, it's unbelievable. How much of an opportunity is. So anyways, Michael: I thought you were gonna say that you're really excited about sour green, Apple Kool-Aid flavor. Tom: That might be the loan pay-down is the sour green Apple. Emil: Oh man. Kool-Aid when you're a kid and Michael: The best, the best. How do you guys feel about Hawaiian punch? Tom: I think American tastes have gotten a little bit less sweeter. At least I could rant on this for a little bit, but I'll finish it. There's been a shift in American culture kind of going to more subtle. Like if you look at like Hintwater LaCroix, if you compare like the drinks that are consumed today, versus the drinks that were consumed like 10 years ago, it's like hummingbird water back then. So I think I have a feeling if you had some Hawaiian punch, like you would be like, what the heck is, this is this like, meant for like a hive of, of hummingbirds, like anyways, Michael: And it's that bright red too! Tom: But the great thing about Koolaid is you don't have to put all the powder in. You can make it culturally adjustable by just putting a little bit of it in and boom, welcome to 2020, just 10% of it and have it. All right, go ahead. Emil: I don't know how I can follow that up with something serious, but just to finish this section, I remember we had this blog post on the Roofstock blog talking about how did single family rental returns compared to stocks and bonds. And the Roofstock team did a little study. It was from 1992 to 2017. So a 25 year period. And if we found that single family rental returns were nearly identical to stock returns and the outperformed bonds with far less volatility. So that was one other thing I wanted to highlight here as well. Plus all the other benefits, like we talk about like tax advantages and all that, which I don't think was factored into this study. Tom: I'm almost sure it wasn't. Michael: Yeah, that makes sense. Because everyone's going to have a different tax basis. Emil: Yeah. This was just looking at returns. Michael: Okay, cool. So one of the last ones I want to touch on which we can all kind of tag team, but I kind of want to give it to Tom to give him a runway to rant. But so many people I've heard say owning real estate makes you a greedy landlord getting rich off the backs of other people. Tom, what would you say to all those people? Tom: I think that people need safe housing, people need housing, and this is just kind of part of the wheel of providing that. So like I think above all, and we've talked about this before an earlier episode, like at the end of the day, it's about like habitable safe places for people to live. And I think as an owner, that's like a key part of the responsibility, so sure. Their incomes earned. It's like a little business that you own with every single one of the houses. But at the end of the day, like at this, we're talking about people's where they live and being able to provide that is valuable. Emil: I think anyone who kind of believes this, I think you should a hundred percent become an owner because then you'll have a better idea of both sides of the coin. Right. You'll have owned, you'll have rented, I've rented, I've owned. I think having been in that spot right where you're a renter and you know, you've dealt with a landlord. I think it makes you more empathetic to your tenants. Like I want to provide a safe habitable unit, like Tom mentioned for those reasons. Like, if you're, if you're a good person, you care about other people, it's not like you're going to become an owner and all of a sudden just be like terrible person not providing for them. So I actually just, if you believe that, I think you should become an owner and just have experienced on both sides personally. Pierre: As a renter, I have to say that it's way better to have a cool landlord. Michael: Yeah. It's way better renting experience to have a cool landlord. Someone that's a real person as opposed to just a machine. Tom: Yeah. And I don't, it has to be so black and white at that. Like you're only trying to maximize your return at every single look. I think there's a lot of places where that makes sense, but there's this humanity aspect. So one of my tenants, you know, started just recently had some issues around payment on like an employment and stuff. And you know, I talked to the, reached out to the property manager and said, Hey, you know, is this, is this something, you know, that has to do with the virus or they cause I'm very open to helping them out. Like if we need to make some adjustments or some concessions, you know, as an owner in real estate, you don't have to put on the monopoly outfit and just, you know, drill people into the ground, like, like half a conscious, like this is a good business to build wealth, but it's multidimensional, right? Because you're owning a place where somebody's living at. I think that's a really important aspect to have some humanity as an investor. So it's not, you have to go down this one path, right. You can do business consciously. Michael: Yeah. And to anybody out there that thinks this or anybody out there that you know, is, is catching this type of comment from other people, I'd say, look, you need to understand what actually goes into real estate investing and real estate investors pay tons of money every single year to local school districts in the form of property taxes. So I'm not sure how that makes them greedy, but I would also follow that up with asking them how much money they contribute every year to their local school districts and see what they say. So there's so much money that gets poured into the local economy via real estate investors. And that comes in the form of real estate taxes, property management fees, paying local vendors for goods and services. So, so many investors spend a ton of money on these properties and local neighborhoods that actually are making them more attractive and welcoming, which can often lead to safer communities. So it's so easy for someone to just see one side of the coin and say, Oh, you you're collecting rents. You're making money off this person. Well, yeah, but also there's the other side where I'm contributing to society, paying taxes and making the schools better. So if you want me to stop doing that, that's a different conversation, but you really have to understand both sides of that coin to have an intelligible conversation about it. Emil: Bravo, sir, drop the mic, please. Michael: Mic drop it and walk away from that person. And just kind of in this same vein, I would also encourage anyone who comes up against any kind of resistance to really try to have a discussion with that other person about why they feel the way that they do. And try to understand why what they're talking about may or may not be applicable to your personal situation. Because I think real estate investing is this huge, huge topic. On the podcast, we talk about the remote real estate investing, which is one kind of niche of that, but there's so many other different topics and variances on real estate investing. So a lot of people here real estate investments like, ah, they're evil, they're the worst people in the world. Well, okay. Yeah. There might be some that are evil. It might be some of the worst people in the world, but you don't know me necessarily. And so let's try to understand what you're talking about and what I'm talking about. Cause so often they're not all the same thing. Emil: I like that well said. Michael: So just curious. I mean, have you guys ever run into any type of these comments? Have you gotten any flack for, you know, doing something that's maybe perceived as different from what your peers or others were doing? Emil: Yeah, definitely. I mean, I've mentioned on other episodes. My dad is a real estate investor here locally in Los Angeles and he thinks, you know, I'm kind of crazy. It's still, uh, when I was first starting, especially like what you're gonna buy property, where again, and it's common for people to feel that way because traditionally, everyone felt like, you know, my dad's whole thing is like, if I can't see it, touch it, feel it, there is no way. And that's fine. I think for some people, it just doesn't work mentally as just a blocker. But like Michael said, I think it's about being open to different things. And again, if the option is, do nothing or invest somewhere else to me, I'm not going to let that stop me personally. Tom: Yeah. I think so many people have preconceived notion of what it means to be a real estate investors. And they have this idea of them running out with a hammer and taking the call and it's like, no, it's different than that. It's way more passive. It is way more team-driven, which has kind of been a theme of this episode. So throw away or assumptions on what it looks like and, and come to Roofstock Academy. No, but throw away your assumptions on what it looks like and look at some of these different strategies that we're talking about. If you're looking to do it in a more passive way and not throwing so much of your time of trying to make it work. The other comment that I've heard from some friends is, and this goes again, I think the greedy landlord piece is, you know, someone teasing, I was talking about real estate investment, like, Oh yeah. Always money and being a slum-lord. I'm like, you know, get outta here. Like I think, as I said, like there's a wellbeing aspect and like having these safe habitable places and working with your property manager to make sure that's part of your brand at the properties that you have, you know, it's, it's not about cutting corners and like maximizing every dollar. There's so much more to that. Michael: Yeah. I totally agree. Tom: And several of my friends have now invested, so I, uh, won the day. So go ahead. Emil: And that was the point I was just about to make is I think when you network with other remote real estate investors and you realize there is an ecosystem of us doing it, it makes you feel a lot more confident. So if you don't know anyone else who's doing it, I highly recommend getting in touch with somebody network with them, talk, join groups, join, whatever. Just say, like build that network. I think it's, it's invaluable to have people around you who are doing things similar to you. Michael: Yeah, absolutely. You know, when I first started investing, like you both, I caught so much of that flak of you're going where to invest, you know, why, what, that's stupid, you're there. You're crazy. And I'm like, yeah, well it makes sense to me. So, and now most of those friends I haven't since invested to, Oh, they see what's going on here. But yeah, so much of it too was I felt like this lone wolf, I didn't know there was a community out there. I didn't know the other people doing this. I just heard, yeah. People invest in real estate, but I didn't happen to know very many of them to ask them, you know, am I crazy? Is this insane? But now I realize no I'm laughing all the way to the bank. All right guys, any final thoughts on this stuff? Pierre: I have a question in this vein of remote versus local investing. When would it make more investment sense to invest in your local market as opposed to remotely, if you live in an expensive area? Michael: Super good question. I'll let you guys take it first. Tom: I'll take the first stab at it. So excellent question Pierre of, when does it make sense to invest locally versus is remote. And I think it all has to start at what is your investment thesis? Like? What is your end game map? If I live in an area where I don't necessarily need the cashflow right now, and I'm pretty bullish on appreciation, I live in Northern California where properties are a little more expensive. Maybe it does make sense to invest in a property out here locally. If I'm looking for a property where there's a little bit more of a blend of appreciation and a bit more immediate cashflow, then maybe it would make sense to invest remotely. And to kind of get us to rephrase a little bit is, you know, what kind of returns are you looking for? Like if I had to make this analogous and that's right to like the stock market, like, am I investing in a growth company or am I investing in a new startup, but am I setting a value investing? Like what kind of strategy? And I think that will answer the question on where you're doing your investing at. Emil: The only other thing I would add there is I think comes down to your comfort level. If you just can't for whatever reason, get yourself to invest remotely. I don't think you should just not invest. I think if you can invest locally, go for it, right. If you just can't get over the remote factor and you know, like you could be making better returns elsewhere. The thing is, is there's people investing locally doing insanely well and there's people investing remotely doing insanely well, I don't think this is a, you have to go local. You have to go remote. I think it's just by your comfort level, how much money you have to invest, you know, just your strategy and that your thesis, like Tom mentioned Tom: Price point, great point. And also the volume of homes available. I mean, you're limited just in your own backyard of how many homes are for sale. Go ahead, Michael. I see you. Michael: Yeah. I see you too buddy. Tom: The light in me sees the light in you! Pierre: Namaste! Tom: Namaste Michael: You know, from avatar, we need to hook up our ponytails. Tom: Yeah. I'm touching the microphone. Michael: So the last, I think those are both really great points. The last thing I want to add too it, is what the goal is and what are you trying to accomplish? But one thing I don't think that it has mentioned is the idea of house hacking, which is kind of this concept of you buy a house bigger than you need or a place bigger than you need and you live in it and rent out the other room. So you're kind of getting the best of both worlds and a kind of hybrid approach with, I have a place to live now and I'm making some rental income alongside with that. And so if you do that well enough, you could absolutely see similar returns to a traditional investment property at distance, but get the benefit of living in a house locally. And so what I think is really important to look at as the true opportunity cost and true total cost, because if you're investing somewhere else and continuing to rent while there's a cost associated with that, versus if you buy a house hack locally and are living in it, well, there's a different cost associated with that, but you're not paying rent anymore. So look at the whole picture. And I think just like Tom mentioned, you know, look define what your goal is. So I think I ha how's hacking is a really, really great way to get started in real estate investing and kind of get two birds with one stone and then just like Emil said, what the price point is and what your, you know, you're only going to qualify for X amount of dollars in a loan if you're going that route. And so that's going to be a limiting factor as well. Pierre: What about buying from a family member would buying from a parent, make it more interesting in the way of tax benefits or anything like that? Tom: I mean, a huge way to get ahead in real estate is any kind of discount to valuation. So like if there's any kind of sweetheart deal with that, I mean, you don't want to take advantage of your parents, but like if they're like open to giving you a little bit of a discount, like, man, that could be an immediate, huge head start because you already have like a little bit of equity in the house where some of the tools that we talked about pulling out equity, like cash out refi or HELOCS or all of that stuff like that can give you an advantage there in just the question of like, let's say you're paying fair market value. It really depends on if that house fits your investment thesis. So looking at the type of returns that you would get, then if it fits that then great. That makes sense. I'd say just kind of like specific to your question around family members. Like if you're able to get a little bit of, maybe it's not sweat equity, it's love equity. That's a huge step up. Michael: One other thing too, that I've seen here that works really well. Especially if the house is owned free and clear is your family can finance it for you basically be the bank and you pay them a monthly payment as opposed to getting a mortgage. You can just get, you know, you guys decide what the terms are amongst yourselves. And it's so much easier. The one thing that I definitely would encourage people to look out for and I harp on this literally every day in the Academy is property taxes and especially if it's in California, because I asked my attorney once I was like, what if I just sell this house to my wife for a dollar? Because my property tax base is X, what my property tax has dropped to a dollar. And she's like, yeah, no, that's not how it works. If it's, if it's priced way under market, they're going to assess it at the fair market value and tax you on the fair market value. So even if you're getting a discount on the purchase price, that's great. You just want to be aware of what the taxes are going to look like after the fact. And especially with a lot of these family properties, they've been in the family for so long, they were purchased at such a low tax rate. So being aware of the tax rate and what that's going to jump to is really important for sure. It's going to move in California, but you just want to be aware of it. If you're in another state doing this type of deal, just be, you know, find out what that tax rate looks like. But great questions, man. Tom: I got one more for this. So in the theme of this episode of your friends being able to speak intelligently, when you're, when people try to talk you out of investing in real estate, why aren't you just buying somebody else's property? Isn't there like a reason they're selling it? Why, why, why, why Michael: Is it trash? Tom: Isn't it trash if somebody's selling it, it must be a bad deal or something wrong with it. Michael, would you like to lead this one? Michael: Yeah, it's a super great point and a really great question. I think I hear all the time in the Academy. I mean, it's just goes back to one. Man's trash is another man's treasure, but also you're probably not buying trash. I mean, people sell for any number of reasons. So we'd never know a motivation unless we ask. And so often sellers are selling out of desperation, whether that's, you know, divorce or they need cash for something. So it could be a really great property, could be really great deal. They're just selling it because they need the cash. They could also be selling because they got a nonperforming assets to be performing. And now it's really great. And so we talk about that a lot is adding value. You buy a crummy property, you fix it up. And now it's a really nice property. I mean, that's what turnkey is. Someone is selling a perfectly functioning and performing asset. And so giving people an opportunity to buy it means that they get to make some profit in the middle. So I definitely definitely disagree with that wholeheartedly. I think that people need to understand that there are so many reasons why someone could be selling a property. Emil: No, the only other one I would add is what we call a tired landlord. So someone who just been doing this for 30, 40 years, they're done right. They've maybe they've been managing it this whole time by themselves. And they're like, I'm just, I've made my money. My market has appreciated. I'm going to do well on the sell. I just want to get out of the business. So they're tired and they just want to move on. That's another one. Michael: I love how you said that. They're just, they're just exhausted. Emil: Just, just tired man. I could, Pierre: Did you have your dad in mind when you're commenting on this? Emil: My dad is such a, such a tired landlord. He's an exhausted landlord. He is. He is just like, pardon me. Thinks he loves complaining about being a landlord though. It's just like in him that he likes to compete. It gives him a discussion topic. Tom: Yeah. My comments would be on this is concerns around, you know, why is the sellers have a process and the way that you evaluate the homes that is consistent. So once the property goes through the ringer where you're looking at, you know, condition value, tenant, if they're, it is occupied, all that stuff, you can really make the assessment. If it's a good or a bad deal. And don't overthink seller motivations, just like Michael said, there's going to be any number of reasons within Roofstock there's all kinds of different types of sellers. There are individuals, there are bigger institutions, there are funds and sometimes the funds just expire or sometimes they move, you know, the geographic concentration, they might move to a different market. So I wouldn't overthink it and just do your homework and follow the right steps and doing your evaluation of the property. Michael: Okay. So now I've got a question for you guys kind of a fun one. And just so all of our listeners know, I didn't tell a meal pier and Tom, what the question was before we started recording this. So they are totally going to be blindsided by this. And it's a, it's a pretty traditional question. It's one that, you know, I think is asked pretty regularly of people, but I put a little bit of a spin kind of unique twist to it. So the question is you're stranded on a desert Island. There's the very typical question that I want to know the answer to of what two items would you sum into your location to help you escape to survive? But also I want to know where's the most ideal setting for said deserted Island, Emil: Bali, a surf board, because the waves are going to be amazing deserted Island. I'm just, I don't even know if I'd want to leave. Honestly. I'm not trying to get out of there if I'm just stranded in Bali, no one around amazing waves. Tom: Do you guys watch naked and afraid? Michael: Yeah. It's so good. Tom: What would your survivor score be? Michael: Oh, I would start it probably a six and end at a 7/8. Oh, underdog performing. Sorry. I interrupted. Go ahead. Emil: Alright, so I'd want to surf board item two… Tom: Are we picking locations or picking what we're bringing with us? What's the situation? Michael: Both! Emil: A laptop that has a never ending battery and access to internet. Michael: No dude, we're not playing this “imagine if the best invention” game. Emil: You did, you did not give me any rules, constraints. It's up to my imagination. Creativity. Michael: All right. That's reasonable. And the first thing I would do is use said computer magical computer to get a ticket for my wife and daughter to come join me at the Island. Tom: So, if you're going down, you're dragging them with you. Emil: That's right. Tom, what would you, what would you bring and where would you be? Tom: I think I'd be on the oldest Island of the Hawaiian islands. I'd be in Kauai just because it's, you know, lots of fish around there. I would bring some Kool-Aid from 2000 just cause I know it's diluted. I could just use a little bit. That's going to last me a very long time to match my 20, 20 taste buds. It would last a very long time and yeah, I think I would somehow finagle my wife and son to come join me too with that magic computer that I would borrow from Emil. So there we go. I got Kool-Aid and magic computer. Michael: All right, Pierre, where are you stranded and what would you bring? Pierre: Hmm, maybe somewhere in the Mediterranean, like Malta and I would bring a guitar and a hatchet. Michael: Nice see. Pierre's the real survivor here. Tom: Which guitar? Pierre: I'd bring my acoustic. Probably my Taylor. Yeah, my guitar and a hatchet. Cause I forget what the saying is exactly, but it's with a pocket knife, you can survive, but with a hatchet you can live like a king. a nice I'd built some stuff for sure. Michael: Nice. Tom: You're already practicing. You're hurting right now. We go to peers does desert Maltin paradise and he's mid century. Nice couches beds built. Starts a popup shop. Tom: You're turn Michael. Michael: I would probably go to be in Bermuda because I hear some crazy stuff happens there. I'd be very curious to see what's going on. My two items would probably be a satellite phone so I could order all kinds of great stuff. And if I say anything other than hatchet, I'm looked like a chump. I think I should also bring a hatchet. Tom: Your survival skill just went down. Your Pierre's survivors went down because you had advanced tools. Michael: I could have brought a chop saw. Tom: Yeah. You just went to a 5.5. Michael: Oh, it's such a ridiculous show. Naked and Afraid. But it's so interesting to see what people bring I'm waiting for the day with two people bring the same thing. Like they both bring a lighter and like, Oh crap. Like we didn't talk about this beforehand. Michael: Well, that was our show. Everybody. Thank you so much for listening. We hope you enjoyed it. Don't forget to give us a rating or review wherever it is. You listen to your podcasts, subscribe as well. And we look forward to seeing you on the next one. Tom: Happy investing. Emil: Happy investing.

american california apple man los angeles management creativity academy island afraid starts honestly naked pierre bali sacramento northern california mediterranean hawaiian references malta bermuda emil kool aid micheal hoa help people kauai investing in real estate cannonball tom price helocs chris bennett roofstock maltin tom schneider michael you michael oh michael it michael yeah michael well michael yes michael so michael how tom you michael one michael okay tom how tom yeah tom so michael all emil a michael awesome

3 Simple Systems Every Investor Should Use to Efficiently Scale Their Portfolio

Achieve Wealth Through Value Add Real Estate Investing Podcast

Play Episode Listen Later Jun 30, 2020 34:40

In this Episode Tom, Michael and Emil share their systems that take the headache out of acquisitions and ownership to effectively scale up. --- Transcript: Tom: Greetings and welcome to the remote real estate investor. My name is Tom Schneider, and I'm here with Emil Shour and Michael Albaum. And today we're going to be talking about something that is near and dear to my heart. We're talking about building systems. We're talking about automation. We're talking about scaling. We're going to touch on these topics and a couple of specific strategies as it relates to acquisitions and ownership. All right, let's do it. Tom: All right. Welcome back to The Remote Real Estate Investor. Before we get going today, we're going to do a quick introduction from the host a little bit about ourselves and our experience and background and all that good stuff. So, Michael, why don't you go ahead and lead us off? Michael: Sure. So I'm Michael Albaum. I used to work in my past life as a professional fire protection engineer in the commercial property insurance industry. So everyone has to bear with me if I speak in math terms, cause I'm a reformed engineer. I've been an investor for the better part of a decade and started very traditionally with single families. And now I've found a, found my stride and niche with multifamily value, add projects out in the Midwest. And I'm also the head coach of the Roofstock Academy program and meal. Can you introduce us to yourself and your mustache? Emil: Hey everybody. My name is Emil Shour. I work on the marketing team here at Roofstock. My fun fact is I actually bought a couple properties through Roofstock before I was ever working here. It was a big fan of what the company was doing and now lucky enough to get to help spread the word. And I own a couple single family rentals across the Southeast and Midwest. Tom: And my name is Tom Schneider. I am the director of investor education here at Roofstock. My career has been focusing on putting technology process to scale and build systems. So this episode is particularly exciting for me is how I do this personally, with my investing. I've been in real estate investing for over the past 10 years, and I'm also a California broker. Michael: Nice. Emil: The only one of us who's licensed. Where do you have your license hung somewhere as a broker? Tom: You can just hang it right around here. Michael: Yeah. Hang it on yourself. Tom: Hang it on myself. Michael: The broker test. Isn't so much more work than just the agent test, right? Tom: It is. They've made it harder when I got my broker's license, it wasn't quite as difficult, but they made the experience requirements a lot more difficult. It was kind of funny. I initially worked in acquisitions for one of the publicly traded rates and literally the day that I passed the broker test, the person who was leading our technology says, Hey Tom, we need a can-do guy to help build out a bunch of systems. And I was like, okay, cool. Let's do it. So I got my broker's license and then proceeded to never use it until I did use it when I bought my own house. So I guess it paid for itself there. Emil: What is the difference between an agent and a broker? Tom: I'll tell you, I should kind of have an idea on this. So an agent needs their license to be hung underneath the broker. The idea is a broker understands the business a little more and folks who are agents can eventually become a broker. If they wish to, they basically can operate on their own. So within California, you can apply for an agent or a broker. And the broker aspect of the test is a little bit harder and the requirements to get it is a little bit more difficult. Emil: Got it. So a broker can do everything an agent can do, but an agent can't do everything a broker can do. Tom: Yes. Yes, that's correct. That's a good way to put it. Michael: Getting ready for my broker tests. Emil: Awesome. I've already learned something on this episode! Tom: Early and often, baby early and often. All right. We'll jump into some system stuff. So we have a variety of different things and we're going to have a different one of the hosts take the lead in talking about. So we're going to start with acquisitions. And Emil, why don't you lead us off on some systems, some practical systems that folks can do on their own. Emil: It might be a little obvious, but I still think it's worth stating. Set up automated filters and alerts on the places you look for properties. If you're on Roofstock. If you guys are familiar with stock is our marketplace where people can buy and sell single family rental properties. You can go and filter by whatever meets your criteria and save that filter. So you get notifications when new properties hit the site that meet that filter requirement, same thing on other sites like Zillow or Redfin or realtor.com, wherever you're, once you've figured out your buy box. And I'll talk about that in a second. Defining it, plugging it in as a filter so you get automatic notifications cause you want to be on top of those listings, right? When they hit the site, right? It's a lot more effective than just constantly going on them and checking your listings. Even though I do that all the time anyways, Michael: I don't know about you guys, but I constantly get notifications from Zillow and Redfin about new properties that have hit the market, but I didn't save a filter even, you know, I searched there twice or three times and now I was like, Oh great. You're super hungry for properties in that market. So I'm just getting blasted by these emails. Yeah. Emil: Every time I look@realtor.com, like I was curious the other day about like, what do multifamily in Bakersfield sell for? And now I've just, I've been getting Bakersfield filter notifications from realtor.com. It's like, man, Tom: What's cool about these websites and the filters, a little pro tip is you can get really granular with your filters and set up multiple filters. So what I'll do is on my inbox that I have all set up multiple inboxes and I'll set up a filter within my I'm gonna, we're gonna do filters on filters. This is a very layered, Michael: Filter-ception Tom: Yeah. Very meta. So within my inbox, shout out Gmail, just kidding Emil: @Gmail, let us know if you want to sponsor us. Michael: Yeah. I've never heard of this Gmail, but this Tom Schneider guy talked about it. Tom: Anywho, I set up like a master folder for like incoming property leads. Right. Then within that I'll set up additional folders for each different type of either region or property type. So as new listings that meet my criteria are hitting. I have them in a nice clean folder, so, Oh, great. A new Florida property. That's a duplex in this area and I have a special folder for that. What I'll also do is oftentimes timing can be pretty important and moving quickly, instead of setting up a filter that comes just once a week or once a month, since I have this infrastructure within my Google Gmail, shout out again, I'll have it actually doing real time. So I'm not getting pinged in my main inbox if I'm working on some other stuff, but I have a way to see immediately based on whatever that criteria it's hitting that inbox. So again, the super simple paraphrase, but this isn't that complicated. I have a bunch of different inboxes within my Gmail. And then within the, my buying platforms, I'll set up many filters and many alerts and many immediate alerts. So it'll hit right into my Gmail and I'll know at that time, all right, this one looks pretty good and I can move pretty quickly. And I don't have that issue of, Oh, Property. It's already pending. Like I'm not passively looking for it. It's proactively hitting me as soon as it hits the market and I can act and jumped on it. So that was my extra tidbit on that piece of mill, Michael: That description Tom was amazing. It gave me such a visual of kind of how you operate. And it made me reflect about how I operate. And you, I'm picturing this nice, neat cubby with nice section organizers. And mind's like just a fricking melted pizza, but it's just crap everywhere. It's, I'm so jealous. I want to be like you and I grow up and have these systems, but in place, I love that. Tom: That's why we make a great team, Michael. That's why we make great team Michael: Coffee-man, and melted pizza. Emil: Oh yeah. I'm not surprised Tom is like the most organized out of all of us internally. And I'm not surprised when it comes to acquisitions. You're equally as organized with the pick and choose you pick and choose. There's definitely lots of messages. So one thing, if you're going to one of the sites we mentioned, and you're not sure how you should set your criteria, just know that it's okay to start a little wider. And then as you've looked at more and more listings, I think you'll get better at defining your buy box. I know we talk about it a lot and we say, okay, build your buy box. And sometimes it's hard to just like, know what to choose. Right. I kind of started larger. For example, I chose a couple of different markets, couple of different properties, size, like a bigger property size. Tom: I like it. You feel that you need to shoot with a sniper. I keep using these weapon analogies, but it's okay if you're not sure to start with like a broader spray and then work your way down as you refine what you're looking for. But I'd say it's better to keep it an open, an open range, and then, then shrink that down. Michael: Nick it down. Emil: Yup, exactly. And also because sometimes whoever uploaded the listing, sometimes they don't include that information. Right? So if you have like really, really specific defined criteria, you may miss something where whoever listed at the seller or the agent or whatever, just didn't submit that information. It doesn't hit the filter. I've noticed that on a couple of things. Michael: And just a pro tip for everybody listening to, if your budget is a hundred grand on the high end, set your filter up to one 20 to include properties that are listed above that because you might offer a 100K and get it. Versus if you set your filter criteria right at your end budget, you might never have seen those properties. Emil: Yeah great tip, go like 10, 20% above what you are actually planning on spending. Michael: It also gives you an idea of what the next tier of property looks like. So if you did want to ultimately spend more, no. What would that buy you? Tom: One last piece of advice on building a bike box is to think about how many properties do you practically want to evaluate at a given time? And yeah, you can control this with your buybacks by how targeted it is. So if I have a lot of time and I want to look at a lot of product properties, I'm going to have a really wide buy box. If I don't have a lot of time right now to evaluate properties, I'm going to tighten my buybacks down a little bit. So one way to think about it is to work backwards about what your kind of capacity is for evaluating effectively. Emil: It's also, I think when you're first starting out, I think it's okay to, again, to nail this point of going a little broader, I think with time and experience and having different property types, you'll start to get an idea of like, this is the exact property I want in this exact area. Tom: Awesome. Michael, do you wanna jump on your next acquisition system? Michael: Yeah, absolutely. So, so much of this, in addition to searching, can be done socially kind of quote unquote. And so just talking to everybody who's willing to listen and maybe even some of those who aren't, about what it is that you're looking for. So just in everyday conversations, talk to friends, family members, people in your network about what it is you're doing and what it is you're looking to do because so many eyes are going to be better than, than just one set. So if someone then comes across a property just in their everyday life and thinks, Oh, well, I remember Tom mentioning that he was kind of looking for something like this. That can be a great deal funnel for you as well. Property managers can also be a fantastic, fantastic source of deals for you, which is pretty automatic. You just tell them, Hey, this is what I'm looking for. You, you set your filter, so to speak with them and any property that comes across their radar. Oh, Hey. Yeah. I remember, you know, Emil, I kind of managed this property for him. And he's looking for something like this. It becomes so easy. And so automatic that it's one of those things you can just kind of say it and continue saying it and then forget it. There's not a whole lot of nurturing that has to be done with those types of things, other than some, you know, reminders. And don't be the person that, Hey, have you found any properties yet? Have you found any properties? Just put it out into the universe and just kind of let it, let it bake for a bit and see. Tom: It's like The Secret. You guys remember that book? Pierre: I'm still waiting for that check in the mail. Tom: It's coming! Wasn't it The Secret and then The Answer as a followup or something. Emil: Yeah. Tom: Incredible. Incredible marketing. Michael: I didn't read that one. What's The Secret about? Pierre: It's the laws attraction. Michael: Uh, okay. Okay. Pierre: It's when you focus on something for long enough and eventually it comes to you, essentially. Emil: That's right. You don't have to actually do anything. Just think about it every day. Hope for it every morning, but no action required. Just think about it. Michael: Million dollars, Million dollars! So it's interesting. So for the Academy book club, we just did Think and Grow Rich. And I thought that, you know, that was such a great title by Napoleon Hill and we read it and I thought it was really awesome and talked about a lot of kind of high level things, mindset type stuff. And it was talked about very similar type stuff. And it was, it was interesting. They're all talking about, you know, if we stand around here and talk about blue cars, we'll probably go out and see a bunch more blue cars. And it's not so much that there are more blue cars on the road. It's just that now we're cognizant of that thing. It's kind of front of mind. So it appears more often for us. Tom: Yeah. I love that example, Michael, cause not all systems are digital or not all systems are technology, but it's, it's leveraging the people side of your network of funneling in deals through that. So at the end of the day, like a lot of real estate is a people business and nurturing that and building a system that you want and funneling them in deals is excellent. Michael: All the real estate meetups that I went to, um, pre COVID, they all talk about they'll usually start or end with the needs and wants section. So people talk about, okay, this is what I need or is it “have and wants” Tom: Maybe it's a “give and a take”, I think I know what you are talking about. Michael: Yeah. You announced to the group, what it is that you have to offer to the group and then what it is that you're looking for from the group or from in general, until people say I have money and I'm looking for a deal or whatever. And so it's that those are great opportunities as well. And so again, just kind of reiterating, put it out to the world, don't be embarrassed by it. Don't be shy about it. Just make it known what it is you're looking for. Cause it's tough to help people if they haven't told you what it is that they're looking for. Tom: Awesome. Great example. All right. So I'll touch on the last acquisition related systems slash tip slash ways to scale. And this is a special perk that we have within Roofstock Academy is that members can actually export the listings on Roofstock into Excel. And whenever you can do things evaluating a lot of deals at once, like doing it in Excel, that's a great way to do it. So I guess that the main theme is, you know, try to batch processes together. And in this particular example of being able to download all the listings in Excel, batch that whole evaluation of the whole inventory, you know, in one run where, okay, I'm filtering down to these particular property types or, Oh, I'm filtering down for this particular return. So being able to, if you can get a spreadsheet of what you're evaluating or any kind of way, being able to batch it together, do it saves time. Michael: And for anybody that's really intimidated by Excel because I know it can often seem very intimidating. There are some really great free courses on YouTube and there are also paid courses. If you want to get more in depth with it, about how to use Excel and maybe how to do some of that batch sorting because it's a really powerful tool. So I guess we're plugging Excel and Gmail in this episode. Emil: Shout to Google and Microsoft! Tom: Let's continue on. We're going to go into ownership now and Emil why don't you lead us off. Emil: Cool. All right. So the first one we're gonna be talking about is cash flow automation. So the first thing I do and you guys let me know if you do this as well. I set up auto pay on all my mortgages. I don't want to think about, did I pay this mortgage? I have to mail a check. I auto pay everything just to make it super easy. Especially when you have multiple properties automating. It is like, step number one. You guys do that as well. Michael: Yeah, definitely. Absolutely. Tom: Do you also impound your insurance and property taxes when you pay your mortgage payment? Emil: I do. I know a lot of people won't because they want that capital and would rather use it throughout the year versus giving it to your lender, to hold it to whatever you like to be able to use that capital. I just don't want to have to think about like, okay, I need to come up with X amount to pay my property tax and insurance. It's kind of like duping yourself into thinking you're richer than you are. Michael: I don't, I don't use the impound accounts. I will, if they'll give me a better rate for the mortgage. And then as soon as the loan closes, I cancel the escrow account and just pay it myself. Tom: Sneaky move Michael. Michael: It's something I'm considering doing just from like a meal mentioned ease of operations. It's just one less thing to think about. So it can be great either way. Emil: Why do you not impound it? Michael: For the exact reason you mentioned there are significant funds that are going to be paid to property taxes and insurance on an annual basis. And so I'd rather have that kind of, well, that one time hit is kind of a bummer. I'm able to use that cash. I mean, it's a significant amount such that it's usable on a monthly basis to do other stuff with. And so I just know in the back of my mind that, okay, come this time of year, I've got this big, big property tax bill that's going to be due. Emil: Yeah. I wonder if there is something there in terms of like at a certain scale, it's a lot more money to be working with versus like, let's say you have one to five properties just for ease and it's not that much extra capital that you'd be able to do something with. Michael: Yeah, no, that's a good point. I mean, I think everyone should think about it for themselves because even at that five property level, one to five, your property tax bill could be, you know, $25,000 if we're talking about. Emil: Yeah, that's true. Yeah. Good point. Tom: Just to clarify impounding your taxes insurance is if you haven't deduced this or don't already know this, it's when you pay your mortgage payment, the mortgage company will also collect a percentage of the annual taxes. Michael: They'll take one 12th of the annual tax bill, one 12th of the annual insurance bill with your mortgage payment on a monthly basis. So that you're paying equal payments every month. You're not getting hit with your tax bill or insurance bill just at one time. Tom: And then the mortgage company will just pay it for you. So you don't have to think about it. So, boom, that's another system. So that's a good question about, you know, do you use that money in the meantime, if you don't have to pay it for 12 months, but that could be another potential system. Alright. Emil, I broke your flow. Emil: Finishing up there. My favorite thing is when they audit your account and you have an excess balance and they send you like a check for a couple of hundred bucks and you're like, Ooh, it's like a Christmas bonus or something. Hanukkah bonus baby. For me, Tom: I think I might've mentioned this on another podcast. I like it, but it pisses me off. Cause I'm like, oh geez, what check am I missing? Yeah, it makes me think like, okay, this is great having this check. But I'm like, like honestly concerned that like I may have missed something in the mail because man, there's just so much junk mail as a real estate investor. The wholesalers that email you all kinds of things and like just general, getting a lot of mail. I just get really concerned that I see a check here. That's awesome. But what checks am I not seeing? Because they're buried in between a Serina and Lilly or whatever, a catalog, that's like five pounds and 500 pages. Anyways, go ahead, please continue your answer. Emil: No, please continue your rant. I want to hear that. Tom: I got to build it up a little bit. I got to build it up a little bit. Michael: Tell us more about what other junk mail you received. Tom: We Buy Ugly Houses Houses. So many of those. Yeah. If there's any wholesalers listening, I want off your mailing lists. Emil: Okay. So the next one, this one's probably obvious a lot of people, setting up ACH auto payment from your property manager. So they collect your rent checks. I don't even know if any property managers do this, but like sending you a check in the mail. I imagine most people already set up you raising your hand, Michael. Cause do you do that? Michael: I used to get paper checks because my property manager was pretty old school and I said, okay, please, please, please, please, please, please, please. Can we do this and other way? Yeah, this is just not awesome anymore. Emil: I mean, so that should be like, even part of your PM property management vetting, right? Like, do you do, do you have an online portal where you ACH payments to me? So just make sure you set that up. If it's an option, most property managers in 2020, you will have that. Emil: Maybe Michael went to one that was established in 1925 or something. Michael: 1833 Tom: Is this is the one in Alaska? Michael: No, it's actually properties that I've since sold, but out in Missouri kind, of rural Missouri. And so just to expand upon this a little bit is I think we've talked about in another episode, but my property manager, there was only willing to use a certain bank or the local bank branch wasn't anything that we had locally or that I use. So they would go to this bank deposit, the rent check and then would cut me a check to my bank. It was just a whole pain in the butt kind of thing. So what we've automated is now they'll deposit the rent check and then those rent checks we'll get bill paid from that bank to my local bank where I actually do my banking and then from there and get distributed. And so if you can automate as many of those processes as possible, it becomes much easier. So ACH transfer a potentially from multiple bank accounts to multiple bank accounts, Tom: Are you're hiding something Michael? I'm just kidding. Michael: I don't know. You ever been to the Cayman islands? Tom: That's interesting that a local property manager had a preferred bank that they worked with and yeah, yeah. Michael: They're just like no Wells Fargo or B of A or union bank out there. So they're like, this is what we use. It's like cool, pony express it over to me. Emil: Carrier pigeon that's right. So the last one in this section, we recommend I do this. I have a separate bank account for all real estate stuff. It just makes things easier, especially come tax time. I also just like having it separate cause I try to treat real estate investing like a business to have its own checking account checking account. I use Chase, it's free to set up another checking account and it's just much easier to track things going in and out and it'll make your CPA's life easier. Do you guys do that as well? Michael: I was going to ask if you guys have separate accounts for every property? Tom: You know, it's funny, I just got off a Roofstock Academy coaching session before we started recording this episode and we were just jumping into it with a member exactly on this topic. I don't, I use just one account for all properties. It's just, I don't know, easier. And I don't understand necessarily see the value. Not that it's a lot of overhead to have different bank accounts because you can set them up for free on so many different banks, but I just use one for all the rental properties and yourself, Michael, Tom: I have one account per LLC. And so I've got LLCs that own multiple properties. So all that was kind of funnel into that one. Yeah. What about you, Emil? Emil? I'm just one checking account where everything funnels into nice. Just for ease. Makes it easy. Pierre: What would be one of the benefits of setting up an individual bank account for each property? Tom: The benefit of setting up, if you were to set up a different bank account for each property, you know, what I like about it at a portfolio level is I just have a really tight grip on cashflow within that portfolio. If I was to do it at an individual property, man, it would be just so clear if I'm making money or losing money. You know, we have these assumptions that we use when we are acquiring properties, but ultimately, you know, when the rubber hits the road, you hope to hit those or even exceed them. But you know, by having an individual bank account for that property, you have a really immediate, transparent view into, is this property performing to how I was projecting it with the cashflow. Michael: I was going to say, it's a really good question Pierre. I'm glad you asked it. So because I only have the one bank account set up, I think I'm echoing Tom's viewpoints and opinions that, yeah, it's very easy to see what the actual numbers are, but I found that I just keep an Excel file, very detailed document of, Hey, anytime there's an expense on a given property, I log it the date, the expense, and then the dollar amount. And so that for me, suffices as a very similar type of scenario without the headache, I would argue of having 10 different property accounts searching through which one has what I've got it all in a file for me, that's worked really, really well over the years. Emil: And your property manager, a lot of them you'll have a portal where you'll be able to see all your rent, all the management fees they've taken, they handle a lot of the smaller maintenance. So you'll see those expenses as well. So you also have your property manager, you can lean on, that's going to keep track off a lot of this stuff. The only other thing to track outside of that would be your payments to your lender and then property taxes and insurance. Michael: There's all kinds of miscellaneous stuff that you'll likely have to pay outside of that. So like business licenses, if you're required in that state or LLC fees, franchise tax fees in, you know, wherever you live and wherever it's registered, just misc miscellaneous stuff. And I just attach that to each property and whatever it's paid for, you know, even might have to pay a contractor, something if they're that's outside the scope of what your property manager is doing. And so having a place to document all of that, I find it to be very, very, helpful. Emil: Yup. I also keep a detailed Excel. I don't do it every month. I do it like bi-annually. Michael: Do you do it when you incur the expense or you do it as a reconciliation, every, you know, twice a year, Emil: The latter I do reconciliation. It's probably not the best, but I don't know. Pierre: Yeah. I mean, we're talking about automation, Emil: We're telling you what to aim for. We're not necessarily saying we all do this all the time. Michael: Do, as I say, not as I do. Emil: Exactly. And you know, you don't have to be perfect in all these areas. We're giving people just different ideas, you know, what makes sense to automate. Pierre: Cool Michael: It's one of those too like, we all have bad habits that we've fallen into over the years. And now in hindsight, we'd say, man, I wish I had formed this better habit. So here's what I would do differently. And it's so hard to break those bad habits. Like it's so hard. Tom: Getting the grove for sure. Michael: Yup. Very true. Emil: One other thing, we don't have it here, but I want to talk about it as well. This kind of goes back to acquisition automation, but, it goes back to the concept of paying yourself first. So a lot of us, you know, we have a full time job or we have W2, whatever it is, make sure you set up like an automatic percentage that every paycheck coming in is going towards your investing. So right now, like my process is 20% of every paycheck automatically gets taken out of my checking, put into a separate investing account. And I highly recommend people who are listening, check out a website called I will teach you to be rich by Ramit Satie he has this awesome guide. If you look up, I will teach you to be rich, personal finance guide. It shows you how to automate all this stuff, like having separate accounts for different things you're saving up for. I found that super easy and like a really good way to separate your money and like have kind of different categories and use them for separate things. So I have a separate investing savings account that automatically, you know, income coming in goes into that. So that's another automation thing I do. Michael: Piggybacking off that a meal I've also automated paying myself first from the rental amount every month. So when we do our analyses, we see, okay, we've got the mortgage payment, property taxes, all these other expenses that may or may not actually occur on a monthly basis, but we modeled them that way. So it makes the cash flow easier to understand. And so your property is going to collect rent. They're going to take their fee and are going to give you the rest. Well, now that's a huge chunk of change, but we've still got to pay some of these other expenses. And so we all have calculated on a monthly basis what our cash flow should be. And so I will automatically set up that deduction amount from my property bank account, going to my personal bank account, if I'm planning on using that cashflow for everyday life stuff. So if it's a hundred bucks a month, I just receive rent on the 10th or whatever of the month. And then I automatically have a hundred dollars transfer into my personal account. Everything else stays in the property account to then pay all those other expenses for. And at the end of the year, you had a good year. You might have some extra dollars left over and you can pay yourself again. Or if you had a bad year, you might need to put some additional money back into that. But it's a really easy way to just start collecting money from your properties without overdoing it. Tom: I like it. So the next operational system I'll jump on, has to do with documentation. So if you're an active investor, you will be regularly buying new properties. You will be regularly refinancing had a good episode, I guess it would be two weeks ago. Once this episode is launched on ways to take out equity, anywho, when you are going through that exercise, you're going to need the same documents again and again and again, you're going to need a copy of the current lease. You're gonna need a certificate of insurance. You're gonna need a sample mortgage payment. And what I like to do with this is to streamline this process is set up a folder structure that is secure. There's a couple of different platforms out there, Dropbox, maybe even Google drive, but you know, in a secure folder online, I'll have my relevant documents in there.And then I can use sharing functionality to give it specifically to my lender or specifically to my CPA. That way I'm not needing to constantly track down these documents that I'm going to need again and again and again, and I can safely share it with whoever needs it. So the main takeaway for this system, I guess you can call it that is, you know, don't sleep on it, just have that document structure set up a do it once and do it right and do it early and then have that available for whenever you go through one of these maneuvers, be it refinancing or taking on a new loan or going through tax time. Michael: It's so valuable. I know for my first property, I didn't have these systems really set up in place. I thought I did and then came tax time and I was like, Oh my God. So this is going to take so long to figure this out and go back and collect all these things. So, you know, it's one of those things. It's tough to know what you're looking for until you know what to look for. So ask somebody, ask, you know, ask your CPA, ask your tax professional. Hey, I'm investing in real estate. What things you're going to need from you at the end of the year, they're going to tell you, okay, we need your 1098. We're gonna need all your expenses, property tax, receipts, all these types of things. So that way you can start that ahead of time developing and building these good habits and systems. It makes it so much easier. Come tax time. Emil: I don't have anything else that neither does my mustache. Good job guys. Excellent. Tom: I actually thought of this while you were talking about it. So I love the concept of paying yourself first, right? And with paying yourself first, when you get your paycheck, it's pretty straight forward, right? You take the first 10%, 20%, whatever, and either save it or spend it. However, I like to think about this with your day. So paying yourself first, the first 10% of your day, how are you guys going to pay yourself first with the first 10% of your day? And you're not allowed to say surfing, Emil: I'll go one level up then and just say exercising. I think exercising for me has become as equally as important for my mental wellbeing for the day as it is physical. So for me, that's how I pay myself first to start the day, right? Tom: What are you doing for exercise? Michael: Surfing! Emil: I wish more surfing. Having a small child will put a dent in your surfing ability and it's summer, so the waves were a little slower. I will do. I'll either go for a run or I will do a combination of like pushups pull ups. Or I also use this thing called the seven minute workout app. It's literally a seven minute workout. I don't do long workouts. I don't like, I don't know. I used to spend more time working out, but for me, it's just a matter of like doing it almost daily to just start the day right. Whether it's seven minutes or 30 minutes. Michael: Classic Emil fashion, he stole my answer. But that's why I went first because you're going to try to take that out. So not surfing, but I like to do kite surfing and I also work out. Do you exercise in the morning? I find that getting my blood pumping helps kind of burn off that haziness in the morning. But since the meal took that already, I really liked journaling in the morning. Just even for a few minutes, a few paragraphs, just kind of what I'm thinking about. What's going on personally in my life and what my goals are. I read that book think and grow rich. And that reaffirm that journaling is a super powerful tool. I've always known it, but again, it's one of those bad habits that it's hard to break into if you're not used to doing it. So starting slow and just trying to get my thoughts out on paper outside of myself, I find it to be helpful and worthwhile. What about you Tom? Tom: So the first 10% of my day has gotten a lot earlier with a small child. So, you know, it's, it's now like the, you know, late five's early 6:00 AM is the first 10% of my day, but excellent partnership with my wife helping out. Well, she has the lion's share for sure, but on the extra early days, all right. I'm digressing. Okay. Going on a walk. So, I mean, I guess this is exercise. Sure. Why not? So getting the baby early morning, throwing him in a little jogger or the stroller walking around the street in the morning when like everything's still quiet and the sun's just creeping up over the Hills and the fog is kind of lifting journal in my head. I dunno. So like walking around in the early morning when nothing else is going on, I know that's a fine first 10% of the day way to pay yourself first. Michael: As the only person without a baby, just a PSA, you know, you probably shouldn't throw babies into or at anything whether it be a jogger or cribs. Tom: Oh, they're, they're pretty durable, but yeah, for sure, Emil: They are very durable. Pierre: Antifragile. Emil: Antifragile. Tom: Antifragile! Yes, they get stronger with it. Yeah. How about yourself Pierre? Your first 10% of the day? Pierre: I like to save my working out for the end of the day so I can have a break between my work day and the evening. So the morning is a good time for me to read. Emil: I used to read a lot in the morning, baby killed that. Tom: Got anything good? Any good books going? Pierre: I'm a little bit behind with the book club, but I'm reading the book that Michael chose for the RSA book club, Never Split the Difference. Emil: Great book. Pierre: And this morning I read the ebook that email sent me and the article on how to write better titles for the podcast. Emil: Got to keep the audience clicking. Michael: Yeah, that's great. Speaking of our audience, if anybody has any thoughts, suggestions, insights, hot topics they want to hear about. Please feel free to let us know at eshour@roofstock.com, malbaum@roofstoo.com, or tom@roofstock.com. Emil: Or hit us up on Twitter. I'm @emilshour, Michael you're @albaummichael. and Tom you are. Tom: I am not positive… I'm @tscnheido Michael: Freaky deaky Tom Tom: Yea, created like whatever, 15 years ago, something like that. Emil: I like it. Michael: Skater dude, 27 with an eight. Tom: Exactly. Awesome guys. Well, thank you so much for listening today. To our episode, we hope that you got some value out of it. If you liked it, please don't be shy. Please rate us. Please subscribe as a meal set. And like Michael and Emil said, reach out to us. We love to hear your feedback on future content to do and to keep driving. So, alright, happy investing. Emil: Happy, investing. Michael: Happy investing.

covid-19 christmas god california google secret speaking microsoft academy llc missouri alaska investors defining scale midwest hang incredible property pierre cpa excel psa hills southeast hanukkah gmail ach makes wells fargo dropbox emil napoleon hill grow rich zillow versus bakersfield rsa efficiently w2 llcs never split redfin cayman simple systems serina roofstock tom schneider michaelas michael it michael yeah tom it google gmail tom you michael albaum michael there tom yeah tom so tom oh michael all michael sure michael for tom one remote real estate investor

Michael Smith: Room Tone

She’s A Talker

Play Episode Listen Later May 1, 2020 25:06

BONUS EPISODE In this bonus live episode, artist Michael Smith talks about how to get creative with bad teaching evaluations. Season 3 coming soon! ABOUT THE GUEST Michael Smith’s recent solo exhibitions and performances include Museo Jumex, Mexico City; Yale Union, Portland, Oregon; Tate Modern, London; and Greene Naftali, New York; and the Institute of Contemporary Art, Philadelphia. His work is in the collections of the Blanton Museum of Art, The University of Texas at Austin; Inhotim Institute, Brumadinho; LWL Museum für Kunst und Kultur, Münster; Migros Museum für Gegenwartskunst, Zürich; Mumok, Vienna; Museion, Bolzano; Paley Center for Media, New York; Centre Georges Pompidou, Paris; and the Walker Art Center, Minneapolis. ABOUT THE HOST Neil Goldberg is an artist in NYC who makes work that The New York Times has described as “tender, moving and sad but also deeply funny.” His work is in the permanent collection of MoMA, he’s a Guggenheim Fellow, and teaches at the Yale School of Art. More information at neilgoldberg.com. ABOUT THE TITLE SHE'S A TALKER was the name of Neil’s first video project. “One night in the early 90s I was combing my roommate’s cat and found myself saying the words ‘She’s a talker.’ I wondered how many other other gay men in NYC might be doing the exact same thing at that very moment. With that, I set out on a project in which I videotaped over 80 gay men in their living room all over NYC, combing their cats and saying ‘She’s a talker.’” A similar spirit of NYC-centric curiosity and absurdity animates the podcast. CREDITS This series is made possible with generous support from Stillpoint Fund. Producer: Devon Guinn Creative Consultants: Aaron Dalton, Molly Donahue Mixer: Andrew Litton Visuals and Sounds: Joshua Graver Theme Song: Jeff Hiller Website: Itai Almor Media: Justine Lee Interns: Alara Degirmenci, Jonathan Jalbert, Jesse Kimotho Thanks: Jennifer Callahan, Nick Rymer, Sue Simon, Maddy Sinnock TRANSCRIPTION NEIL GOLDBERG: Hello, I'm Neil Goldberg, and this is She's A Talker. We recently finished our second season, and we'll be launching Season Three very soon. In the meantime, we thought as a bonus we'd share a live episode that was recorded with artist Mike Smith way back in the good old days of February, 2020. The event happened at the New York headquarters of the Skowhegan School of Painting and Sculpture. Skowhegan's primary program is an intensive summer residency up in Maine for sixty-five emerging visual artists from all over the world. And in 2015, I had the good fortune of being faculty there, and it was actually there that I took the first steps for what would become this podcast. I was inspired by all the experimentation happening, and I decided to play around with this collection of thoughts I'd jotted down on index cards for the past twenty years as the basis for some sort of performance work. So here we are. My guest, Mike Smith, was also faculty at Skowhegan a couple of years before me and has been a favorite artist of mine for years. He's recently shown work at the Tate Modern in London, and his work is also in the permanent collections of MoMA, the Walker Center, the Georges Pompidou Centre in Paris, and many other places. Here it goes. NEIL: Hi everybody. Thank you so much for coming. So, the premise of the podcast is I typically start with some recent cards, uh, before I bring on a guest. And I thought, uh, this is a recent one: seeing an unflushed toilet at an art school. Now, um, I teach at Yale and, uh, I try to like use the bathroom as far away from where I teach as possible. And I also like to try and mix it up a little bit. So, you know, every now and then I'll go into the basement. Other times I'll go to the second floor. Uh, keep them guessing. And there was a while, very recently at Yale, where every time I walked into a bathroom stall, there was an unflushed toilet full of shit. And I started to think like, okay, is this like a student's like art project? Um, but then beyond that, I really was cognizant of the impact it had on the crits I did later in the day, which is like, I found myself sort of evaluating everything I was seeing in relationship to the impact that seeing a unflushed toilet unexpectedly will have on you. Because think about it, that moment where you're kind of like, you open the stall door and there is the unflushed toilet. That is, I think, what we're all going for as artists. Um. Anyhow. With all that in mind, I am so happy to have, as my guest, Michael Smith, who I have been a fan of for a very long time. I have actually had the experience, Michael, of going to your shows, and I will say that its impact on me was not unlike that of an unflushed toilet encountered by surprise. So, please welcome Michael Smith. NEIL: Hi, Michael, how are you? MICHAEL SMITH: I'm okay. I guess I, I don't know if I should be flattered or - what I'm following in terms of the conversation or - NEIL: when in doubt, be flattered. MICHAEL: Yeah. I have so much to say. I don't know if we'll be able to get to another card. NEIL: I know, right? Well, what's your elevator pitch for yourself when you? When you encounter someone who doesn't know what it is you do, how do you succinctly describe what it is? MICHAEL: Well, it's usually layered. I usually, I mean, if it's a total stranger, I'll say I'm an artist. And then they say, "Oh, are you a painter?" And I say, no. And then sometimes I'll just cut to the chase and say I'm a performance artist. And then it doesn't go any further. NEIL: Do you feel like that's accurate though? I mean, that doesn't feel to me like it encompasses the breadth of what you uh, do. MICHAEL: Well, when I first started performing or thinking about performing, I would tell people I was a comic. Because it was, I dunno, it was a little more interesting at parties or whatever. And also performance artist wasn't really part of the vocabulary then. Usually I'd say I'm a comic, and then they'd look at me and they said, "You haven't said anything funny." So, it was like, well, I didn't say I was funny, you know? So. NEIL: Um, are your parents alive? MICHAEL: No. NEIL: When, when they were alive, what would they say that you did? MICHAEL: My mother probably would say, Michael is Michael. And Michael - NEIL: That is a full-time job, isn't it? MICHAEL: Michael had such a sweet voice when he was a child. And my father said, I don't know what the hell he does, you know, he didn't know what it, yeah. NEIL: Right. I didn't know you were Jewish until quite recently. You're like one of those stealth Jews, you know, Smith. Okay. MICHAEL: I asked my father once what it was before Smith, and he, he said, Sutton. NEIL: Sutton? That's like a wall that's been painted multiple times, like, okay, and what was it before Sutton? That's where it gets into like Schmulowitz or whatever. MICHAEL: That got too deep. NEIL: Yeah, exactly. MICHAEL: It was, yeah. It's opaque. NEIL: And what's something on you - today, what's something you've found yourself thinking about? MICHAEL: Well, you know that card you first - NEIL: Oh yeah. MICHAEL: That card you first brought up. I actually, I've been in my studio for, since '99. And I actually cleaned the toilet in the public bathroom for the, the building because it was just getting a little gross, so I thought I'd clean it. NEIL: You just took that on yourself? MICHAEL: I took it on. NEIL: Wow. MICHAEL: Yeah. I should also say that when I first came to New York, I was a professional cleaner. NEIL: Really? MICHAEL: Yeah. I was very good. NEIL: I bet. MICHAEL: Mike the Wipe. I was originally I, I was, I originally was going to be a house - well, I was going to, I advertised in the New York Times, "Mr. Smith will cook and clean." And no one wanted me to cook, you know, just wanted me to clean. NEIL: So many follow-up questions, Mike. Um, shall we move on to the cards? You don't have a choice at this point. We're all in. Uh, this card says: There are no friendly reminders. You know, like, I feel like, is there anything more passive aggressive than someone's like, just a friendly reminder. MICHAEL: That's like, if they, if they preface what they're going to say with that, yeah. That would be horrible. NEIL: But they do all the time. MICHAEL: Really? NEIL: Yeah. Or in an email - friendly reminder. How many, I mean, haven't you? I've probably gotten a friendly reminder in the last week. MICHAEL: I guess FYI is not a friendly reminder, huh? NEIL: No, FYI can be pretty passive aggressive too, but I use it a lot MICHAEL: BTW? NEIL: That's fine. Yeah. I dunno. MICHAEL: So, I have a feeling I probably do it, but I'm not aware of it. NEIL: Of a friendly reminder? MICHAEL: Yeah. NEIL: Hmm. So you're not bothered by it? MICHAEL: Probably, yeah. NEIL: Probably not bothered by it? MICHAEL: Probably bothered by it. Yeah, I am. I get bothered by people easily. And I had something really good to say, but I've, I've already forgotten it. NEIL: I'm excited for the rest of this conversation, Mike. This is, um. MICHAEL: I'm still thinking about that dirty toilet. NEIL: We could go back to that anytime you want. NEIL: Uh, this card says: Things that are lost but you know will turn up. Talk to me. MICHAEL: Well, I, I was with a friend the other day, and, um, I, I said, Oh, I don't, I don't recognize that person. I said, I'm not good with faces. And then she mentioned the name and I said, no, I'm, I don't recognize the name. I'm not good with names. And she said. Mike, what else is there besides faces and names? So anyways, I just wait until it comes, you know, it just till, the name comes, I just wait and wait. And in the morning, I figure, after looking at all those places for the keys or whatever, I'll eventually find it. And then I'll look in the unlikely places and I find it. NEIL: What are the unlikely places in your life for keys? MICHAEL: You know where I've been to keeping them lately? On my front door. So I go outside and they're always there now, so yeah. That's where I seem to keep them. NEIL: That is really, why don't we all just keep them there? MICHAEL: Right. I trust my neighbors, evidently. NEIL: We just very recently got a knock on the door from our neighbor Arlene. A shout out to Arlene if you're listening, and I know you're not, but, um, bless Arlene who very aggressively knocked on our door. She kind of is like policing the hall in a very loving way, but authoritative. And I left the keys in the door. And um, you could tell Arlene lived for this moment. The keys, they're in the door! You know, it's like, and uh, and then of course I have to like reciprocate with like, um, thank you so much. Oh God. Wow. How did we do that? Thank you, Arlene. MICHAEL: I have - the person that polices our place, uh, has a Trump hat. NEIL: Oh no. I don't know if I could deal with that. MICHAEL: He is taking over the recycling, which is great, but he's got it under lock and key, literally under lock and key. So you go downstairs to get rid of your bottles and stuff. And it takes a lot longer. So then everybody just leaves it down there. NEIL: Every now and then, forgive me, is there like a, an immigrant child in there as well? MICHAEL: Oh, there's not an immigrant child, but there is something I think it, I realized it bothers him, that people pick through the garbage and it's mostly like, you know... NEIL: The people who shouldn't be here. From the shithole countries. MICHAEL: Yeah. So I thought about that later and then I just didn't want to think about it anymore cause I was getting all upset. NEIL: Um, have you had a political conversation with him or? MICHAEL: I don't go there. Yeah, he's on, he's a little unstable and he asked, one time he asked me if I wanted to take something outside. NEIL: Oh, he asked you if you want to, I thought, take something outside like garbage. MICHAEL: Right. NEIL: But no, he wanted to take a discussion outside. MICHAEL: Yeah. NEIL: Wow. I'm gay enough that I have never had that conversation, you know? Uh, or if it is, it's like, it's nasty and it's happened a long time ago and it wasn't a fight. Um, wow. Okay. I'm glad that worked out okay. Uh, this card says: Read my - MICHAEL: Can I be, can I, I had a hard time reading that, kind of, reading them. NEIL: Yeah. Well. MICHAEL: Your penmanship is like... NEIL: Well, I always say if my, if my handwriting were a font, it would be called Suicide Note, so I'm... MICHAEL: Not judging. I just said I had a hard time, you know, deciphering it at times. NEIL: Yeah. Read my course evaluations at my funeral. That's what that says. MICHAEL: Oh, well, I was thinking that when, when I do pass, I would like to get ahead of the thing and have people send out a, uh, an announcement saying, if you happen to be in the neighborhood, you know, come to my show, I'll be like, you know - NEIL: I'll be here for eternity. MICHAEL: Um, class evaluations. Yeah. I love my class evaluations and I save them and I, I find them very funny. One, I actually made a poster and it was, uh, it was, "I'm not sure if I agree with the way Professor Smith teaches this class. He called my work crap and he called us idiots. This is a waste of my time and money." I was very happy with that. NEIL: And you made that into a poster? MICHAEL: I made it into a poster. NEIL: Do you, do you have any other ones that come to mind? I bet you get great course evaluations. MICHAEL: Some are good. But like I, I forget them, you know, um, I get them, I still get them handwritten. You're supposed to, a lot of people just go online, but I always, I always hand them out and, and I, I have to leave the room and I always say to them, before, "My livelihood and my future is dependent on how you judge me. And I'm so sorry, I meant to bring the donuts. We'll get to that." NEIL: Huh? See, I try to be real coy about it. Like, you know, they make me do this and, you know, try and like keep it open to, um, other than positive feedback. But obviously it's a desperate wish for approval. MICHAEL: Yeah. I, I always tell them I care deeply for them too, when I'm, yeah. You know, I care deeply for all of you. NEIL: See, you can, MICHAEL: One thing - I, one of my students who I happen to, like, he- NEIL: Happen to like. Whatever. MICHAEL: He came up to me and he said, you know, Mike, even when we're watching videos in the dark, we always know what you're thinking. We can always read you. NEIL: Wow. That's a scary thought. MICHAEL: It is. Cause I'm, I have no filter with, you know, I, I just, it, it comes out, I just sort of convey it with my face. NEIL: See, I find you, because there is a kind of like genial neutrality, you know, like the, the idea of like quote unquote resting bitch face. You have kind of like resting, mm, bemused face. Um, I find it actually kind of opaque. I wish I knew what you were thinking. MICHAEL: You know what? A lot of times nothing. I get the feeling I'm not answering the, I'm not answering these cards very, uh. NEIL: Do you need me to take care of you a little bit right now in terms of - I think you're doing a phenomenal job. You know, this is a fucked up, um, project, by the way, because everyone, like I, I once was doing an iteration of it and this kind of high powered curator said to me, did I do okay, or did I do it right? And I wanted to say like, you did, there's no way of not doing this right, but let's talk about why you've never put me in a show. But that's a different story. The faces of spectators at art world performances. The dutifulness and absence of pleasure. We've all seen this like documentation of a performance at an art event and you see like the spectators, like- MICHAEL: I often say to my, uh, um, to myself and sometimes my students, where's the joy? Looking for the joy. You're talking about pleasure. I'm looking for the - all the time, I'm wondering about that. NEIL: Where's the joy? Yeah. I'm stealing the hell out of that for any teaching I do. And also, that would be my teaching evaluation for like 95% of the art I see. I mean, it can be art about, um, Auschwitz and you can still appropriately ask the question, where's the joy? Don't you think? Provocative question. MICHAEL: Um. NEIL: What was the question? MICHAEL: No, no, no. I thought I'd get some room tone. You know, we start with the toilet and then we put, where's the joy with Auschwitz. You know, this is- NEIL: This is like a balanced meal or something. I'll take the toilet, joy, and Auschwitz. Well, we'll have to talk about what constitutes dessert within that. NEIL: Uh, okay. Let's try this: The brutality of a memorial service having a duration. MICHAEL: All right. Are you, a duration, like a time limit or like, um, it doesn't end? NEIL: You answer it however you want. MICHAEL: Well, I, I, I think brevity can be good, you know, um, and I don't think I need to go to a durational memorial. I may have misunderstood the question or, not the question, the card. I have been in position where I've, I've helped organize them in a, you know, like emceed them. So you get a little nervous, you know, so you want to keep it like, it becomes like a fucking variety show. NEIL: Exactly. That is so true. Memorial services are a variety show. MICHAEL: I don't know if that's appropriate. You know? NEIL: What should it be instead? MICHAEL: Well, it can, I guess it, it should be kind of free-flowing and with me at the helm, it's not going to be free-flowing. NEIL: Because you keep it, you keep it moving? MICHAEL: I try to, yeah. NEIL: That's a lot of responsibility. I've never, I, I've done, I, I seem to be the person who you will call to do the slide show for your loved one's memorial. I've done a number of them. MICHAEL: That's a lot of work. NEIL: It is. And you can't complain about it. Uh, you know. MICHAEL: And also you have to be in touch with people to get that material. NEIL: That I - that I have subcontracted and, you know, but even so, it's a lot of work. And you do not want to fuck that one up. Um. But see, for me, I love the idea of durational, like for those of our listeners who don't know, there's a terminology within the art world of durational art, and to me that is like the height of decadence. Like we have such a surplus of time, you know, that we're going to make art from that surplus or something. You know what I mean? MICHAEL: I have a, getting back to my students, I have a, um, a three-hand rule. NEIL: Oh, let's hear it. MICHAEL: Um, well, if some of the, when I'm covering some work like early seventies, you know, and you kind of get the idea after like five minutes and it goes on. If, if one person, three people raised their hand, we'd go onto the next video. NEIL: I am learning so much today. MICHAEL: But I don't think you can do that in memorial service. I don't think that'll, I don't think that'll work, no. NEIL: Oh, that's funny. MICHAEL: How surprised would they be if you, you mentioned that in the beginning of the memorial? NEIL: Yeah, listen, not to create pressure, but it's kind of like the Apollo where you get the hook. MICHAEL: How am I doing, how am I doing? Yeah. Right. NEIL: Okay. A bad X you would take over a good Y. So, for me, perpetually, my example is I would take a bad episode of RuPaul's Drag Race over a good Godard movie. So, what's a bad X you would take over a good Y? MICHAEL: Well, I'm of the school that something bad can have lots of charm. There's something redeeming about it. Where there's something is overly so good, like a certain kind of Broadway kind of, um... NEIL: Careful. MICHAEL: Yeah. Well, you understand a certain kind of large delivery or something. A certain styling, a certain song-styling. Um, oh, I'm going to lose the whole audience on this reference. NEIL: Go for it. You have me. MICHAEL: Okay. The, the, the Bobby Short commercial singing Charlie. I would, I will always cringe at that one. And then I would much rather take a bad public access, uh, commercial than that. NEIL: There's a fragrance that's here to stay and they call it Charlie. NEIL: Um, so Mike, uh, what is it that keeps you going? MICHAEL: Uh. Hm. I don't know what's keeping me going right now. Um, that's a big one. Um, I, you know, when I was lot younger and doing my work, I, you know, and reinventing the wheel, you know, reinventing the wheel and stuff, I was very excited. But I don't, I wonder what, what keeps me going? No one knows. No one knows. Looking for the joy. NEIL: On that note, thank you to all of you for being here. Thank you, Mike, for coming to this live taping. Thank you to everyone at Skowhegan. Sarah, Katie, Kris, Carrie, Paige, everyone else. Um, now, this series is made possible with generous support - thank you Jesus - for Still Point Fund. Oh, Siri, something set Siri off. That's, that's my husband, Jeff. Um, oh, sorry. I know, you know, it's interesting. One of the cards I have is every time I stub my toe, I look for someone to blame. And it's often Jeff. And, um, so. Uh, the calls are coming from inside the house. The house being my subjectivity. Let's do that again cause this is important. This series is made possible with generous support from Still Point Fund. Devon Guinn is our producer. Molly Donahue and Aaron Dalton are our consulting producers. Justine Lee handles social media. Our interns are Alara Degirmenci, Jonathan Jalbert, Jesse Kimotho, and Rachel Wang. Our card-flip beats come from Josh Graver. And my husband, Jeff, sings the theme song you're about to hear. And he's going to perform it live. He's a professional. JEFF HILLER: She's a talker with Neil Goldberg. She's A Talker at Skowhegan. She's A Talker, it's better than it sounds. NEIL: Thank you, everybody. Thanks everyone for listening to this bonus episode. Keep your eyes open for She's A Talker, Season Three, coming soon. And in the meantime, be well.

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Ep 198: Steampunk YA Adventure with Michael Vance Gurley

Big Gay Fiction Podcast

Play Episode Listen Later Jul 22, 2019 47:07

Jeff & Will talk about their upcoming trip to New York City for the Romance Writers of America national conference and reveal the news that they will be among the presenters at the RITA Awards ceremony on Friday, July 26. Will reviews The Masterpiece by Bonnie Dee while Jeff reviews a book Bonnie co-wrote with Summer Devon called The Nobleman and the Spy. Jeff interviews Michael Vance Gurley about his new YA steampunk novel Absolute Heart (Infernal Instruments of the Dragon #1). Michael discusses the inspiration behind the story, what he did to build the world it takes place in and what he hopes for the trilogy. He also talks about what's coming up next for him. Complete shownotes for episode 198 along with a transcript of the interview are at BigGayFictionPodcast.com. Interview Transcript - Michael Vance Gurley This transcript was made possible by our community on Patreon. You can get information on how to join them at patreon.com/biggayfictionpodcast. Jeff: Welcome Michael to the podcast, or back to the podcast I should say. Michael: I'm super excited. Thanks for having me Jeff. Jeff: Yeah. We were talking before I hit the record button that we last had you on in Episode 42 and now we are at 198, it's kind of crazy. So like you did the first time we had you on, you've come up with a book that I didn't even know I needed to read when I first got to read it. So you've got this YA book called 'Absolute Heart'. It's the first book in the 'Infernal Instruments of the Dragon' series. Tell everybody what this is about, both the book and the series behind it. Michael: 'Absolute Heart' is above all else a steampunk book. It's an adventure set in a world where clockwork powered England - in 1880s Victorian era England - is at war, a sort of Cold War, when we first pick up the series, against the Magically Powered Ireland who's been kind of besieged by the Brotherhood of the mage. It's a clock. It's a warlock group that is sort of made the queen subservient to them in ways you have to find out when you read it. And it's really the story about two boys. Gavin the high councilman's son from England and his friends, following him when he has these terrible secrets - he thinks they're terrible - and when they're found out he could be executed for them, for at least one of them. So he does what all teenagers do when they have something awful happen and they think they're gonna get trouble, he runs away and his friend, his best friend Landa who's an art officer, which is a mechanic, a computer engineer and she's a powerful female character that I'm really proud of. And she has his back and challenges him and calls him foolish when he's foolish and she goes with him and some other people who have their own agendas on this quest. Then the other side, the Brotherhood, sends Orion of Oberon who is a young warlock of immense power because he's the nephew of the ailing Irish Queen. They send him off to get the most powerful weapon in the world - the dragon stones and there's a lot of mystery and history about the dragon stones and what they are and what they can actually do, but they want them to end this war in their favor. So of course they have a meet cute, or at least I hope people think it's a meet cute. They have to decide like, are they going to get together? Will they/won't they? Of course, there's the will they/won't they thing. I'm really excited about the steampunk adventure and it sets off and is set to be a trilogy so I'm really excited about that, and hopefully people will like it - the inclusion of fairies and the air steamships and all the wonder that is steampunk. Jeff: Steampunk it's so not really anything I read... I dabble in it periodically, but something about Gavin and Orion and the bad ass friend you gave Gavin. Full disclosure to the listeners, I read a very early draft of this. You have a lot going on in book one, what you've parroted back now, into a more condensed story, but how did all this coalesce and come together and what was the inspiration? Michael: You really should pat yourself on the back because your viewers should know that you read an early ARC and gave me notes, and edited, and really kind of dissected it for me - like, wherever it was messy you, like a good editor said, "That's messy." The research starts with reading steam punk books and reading a lots of YA, which is of course a terrible addiction of mine. In reading all of that steampunk and finding those characters that you like, and you want to write about - because I use Scrivener, you have the photo option to put your vision of the characters, the places, the ships - you put photos in there and I work with a split screen so I can always reference that, so I never really lose track of it. But yeah, it was great looking into all that steampunk stuff and going into like Cassandra Claire's 'Clockwork Angels' series or Scott Westerfield's 'Leviathan' series. And if I can get even a little bit of that spirit I'll be really happy. But it starts with loving steampunk. You really should write what you know and write what you love. I've never been an airship captain but I love reading about them and I love that whole idea. And you know, thinking about like 'Leviathan', that series has a powerful gender bending quality to it, with the girl because she has to, dresses like a boy and acts like a boy in order to have a career - and I love that. I hope I've engendered Landa with that a little bit as well. Jeff: What went into creating your world of magic in Ireland and steam power and clockwork in England, because there's so much that you can pull from to create the steampunk universe. What was your decision to make these things your universe? Michael: Steampunk is - one of the amazing things about it is, an amazing thing about worldbuilding as well, is you can go with historical fiction. You know, like my first book and it's wonderfully creative but you're also stuck with... you can't lie. It's historical fiction, you can make up characters and you can make up some things, but really if you get too far away from reality, people stop believing in what you're writing about with historical fiction. At least I think so. I stuck with the roaring 20s pretty well and that kind of thing. Steampunk is like a little bit to where you're in the 1880s Victorian era. But then you have these advances and you can get creative and wild and all of that. A lot of that came from traveling for me too, like I've traveled to Ireland and I kissed the Blarney Stone, which of course means I'm full of B.S. I guess, the gift gab you know. And then I went to England and I went to Stonehenge and I played around amongst all of the hinges there, because that's where they keep them, and how a lot of fun. And the idea of the magic stones and power and Irish magic and castles - and then of course the troubles with the war between Northern Ireland and England - and I just rolled that back 40 years or so, and brought all that magic and the Stones and the power, I brought all that together and that's really where the idea came from. I also wrote a comic book like 20 years ago that had a lot of the fantasy stuff in it and it never got published but I tweaked it and changed it throughout the years. You can almost say that this part of this book- the backstory, the fantasy magic side - is about 20 years in the making, which I guess makes this a labor of love. Jeff: That's very cool that it goes back quite that far. Michael: Makes me feel old saying it out loud. Jeff: You could have had the idea when you were 5 or 6. What do we have to look forward to as the as the trilogy progresses - without obviously spoiling anything necessarily - but what can you kind of hint at about the story arc? Michael: Well, you know I'm a big fan of sci-fi, and Steampunk is really an offshoot of sci-fi in a way, or vice versa I guess. But, you know 'Star Wars' originally was 'Star Wars' and then they added 'A New Hope' to the title when they were like, "Well, you know Darth Vader is still out there." I mean, you know they gave Luke and Han Solo some medals. But, you know, then you get Darth Vader out there. So I love that idea of there's always more. If you look for it, if you see the little bits, like there's actually Darth Vader and an emperor... we're still at war guys, so come back for 'Empire', and guess what, it's going to get darker and worse and that's really kind of what's happening here - the book sort of gives you an ending but - and I think so does every book [in the series]. It has an ending, but it really isn't. If you're reading it, you know there's a lot more that's about to come down, and we might lose some people along the way, and maybe find some new people that you love, who's together might not always be together. Jeff: So with everything, between the magic and the clockwork and the steam and everything, your story, your book bible for this must be huge. Michael: I used this great British author named Ellen Gregory who did some high seas adventure, and she read an early Edit 2 and gave me some criticisms - which I kept calling British-isms - and gave me some pointers in that, and we were joking about that too, that I have one hundred pages on the parts of a ship... hundreds of pages and you could just bore people to death writing about that. It's like giving that little bit to make it believable, and make it feel fantastic or whatever, and then let it go. And then I just use that incredible knowledge about mid ships and jibs at parties. I can talk about all that stuff at a party now, but you don't put too much worldbuilding in, but it is fun. I do have lots of stuff, like when I'm writing, there's fairies in the book and I did so much research about Oberon, the king of the fairies and all that history. And then my amazing editor Dawn Johnson at Dreamspinner/Harmony Ink - I mean the whole team has been amazing, and each person has challenged me. Which is really part of the deal, you have to kill your darlings right? You have to allow some of your characters to change with some of the professional feedback. And so, anyway, I was able to use that research and pull it in and I still miss stuff, and some of those editors were like, "Hey, you know the name of that person? Shouldn't it be this, for this reason historically?" I'm like, "Yep, I don't know what I was thinking." You know, And so it really takes a village, you know. Jeff: What do you hope people get out of this book? Michael: What I'm hoping to get out of it is enough people interested to get a whole trilogy out of it and to get an audio book. I really want to hear this story come alive - the swashbuckling adventure come alive. I hope people get entertainment out of it. I hope they feel empowered and maybe challenged on their beliefs a little bit, which is, you know, a lofty goal. And it sounds like hubris to say it, but I hope people read it and see the LGBTQ+ world is just like everything else. It's steeped in mystery, and history, and great characters with amazing depth, capable of heroic acts and terrible evils, and everything in between. You know, some people will write a character and be afraid to make the gay character or the trans character do something horrible, but that's wrong. They have to do everything that everyone else does in order to make it real. And so I'm hoping people will forgive me if I do something horrible to a character, or make them do something terribly wicked... you know, mustache twirling - and not, of course, hate the straight characters that do bad things as well. Jeff: Right. Now, you kept a lot of this book in your family, in some ways too, because your husband Jason Buren did the cover and interior art - and the cover is gorgeous. Michael: Thank you. I love the art. Jeff: How did he come to get involved in it an what was it like collaborating with him on those elements? Michael: Well, Jason's an amazing artist and graphic designer. We actually worked on the first one together and we worked on comic books together and what I realized through it - honestly working with Dawn and the great editors, kind of makes you realize some things - you have to back up and state your vision. Say what you want. Show covers of things you like, and things you don't like, and then not micromanage it. Because then what you're going to get is my artistry, which I'm a writer you know, not technically a graphic artist. So you really get your best work if you let the artist kind of figure it out and that's what happened. I let go of the reins of both books and I think that the covers are amazing, if I do say so myself. I think this cover is so exactly what I wanted to be, and I was unable to say it out loud. And that's what a good artist should do in the interiors too. I wanted so badly to have chapter art and I know that people don't have to let you do stuff like that, but [my publisher] Dreamspinner was so amazing. I pitched this idea of clockwork meets fantasy with the Dragon Wing and the clockwork gears together So I'm so excited to show some of that together with the dragon wings with the mixture. Anyway I'm so excited and geek about it. I even got a little gears as text breaks in the art, in the books, it's really fun. It's really gorgeous. But you, know let go and see what happens. That's the idea. Jeff: When you were here in Episode 42, we were talking about a historical m/m hockey romance called 'The Long Season'. This is a total departure. Unless you can talk about the fact that you're dealing with historical times. Had you always seen in your career switching genres so completely? Michael: You know that's a great question. I want to challenge myself to do something completely different every time. And so, like being a new writer, writing historical fiction was crazy. That's too much to take on. I said, "Well, whatever. It's a labor of love, you know?" So then for my second novel, a trilogy? Themed like science fiction? Like, "Oh you're crazy, that's too much. You're not going to handle it." And who knows what we'll see. The first one got picked up, thank you Dreamspinner and I'm super excited about it. I want to challenge myself and I love that genre. So I say, let's do something completely different. People ask me about doing a sequel of 'The Long Season'. We're doing another hockey book. You know, I'm really proud of the fact that I wrote a character, Maggie in 'The Long Season' who was Brett's best friend. Turns out Bret's best friend started off with John Paul, which I'm really proud that people want a Maggie story and I think that's amazing. Who knows when that might happen. I might do that. My grandmother certainly, when she read it before she passed away, she said it can't end here and she's right... another story. And I did all that roaring 20s research... who knows, I might go back, but I want to challenge myself to do something different. I could write another hockey book because I love it and I love the whole romance side of it and who knows. Jeff: I was thinking you need to find a way to introduce hockey into the Infernal Instruments universe. Michael: I mean, there might be some sports related in there a little bit, but like medieval hockey? That would be fun. I mean the 1880s isn't too far away from Lord Stanley, so they could theoretically run into Lord Stanley somewhere. You know that can happen. Good idea. Jeff: Do you foresee more in this universe, potentially if the if the trilogy works out and is successful? Michael: Yeah. I mean, you know, I think it's set up perfectly for a TV show. That's huge right. But I've even thought about - I have a friend who's a game designer and I even thought about... man, that would be amazing. That whole steampunk idea is a huge world and you'll see in book two, the world's even bigger than you see in book one because it's a world at war. It's a world half conquered by clockwork powered England and half conquered by magic powered Ireland. So everywhere you go France, and Germany, and Africa, and potentially the United States. Are they even the United States? It's a huge world, so the stories could go anywhere. You know I think of like, Gideon Smith books. 'Gideon Smith and the Mechanical Girl' I think the first is called. They, at some point, they end up in an airship going to the United States, and the Wild West, and Egypt, and all kinds of things. Steampunk is open. Jeff: I hope that just keeps going and expanding. So what's coming up next for you? Are you done with book two or are still writing on the trilogy ,and can you look beyond this first trilogy? What's next? Michael: Well, interestingly enough, it goes back to your last question. Books two and three, the trilogy, has a beginning, middle, and end in my head. Of course there could be more after that, much like 'The Long Season', but in my mind I've already started about halfway through writing a third completely different genre book, challenging myself with something completely different, which is a contemporary YA book built on my travels to Antarctica. So it's a YA, two young people who meet and fall in love on a cruise to Antarctica. Sort of a travelog and what happens, and the interesting things, and people, and penguins that they see. I won't give away too much, meaning - that's what I'm in the middle of now. Jeff: That's exciting. A little something new there. Again, totally disparate, but you mentioned what you want to keep mixing it up. Michael: So yeah. And we'll see how that works out. I'm working with a gender nonconforming character, which is really new for me, it's taken lots of research to get intersectionality in the forefront of the book, you know not as a ploy, but as a reality of the world that we live in, and people that need representation. So I'm really excited about that. Jeff: Hurry up and write that please. Michael: All right. Hopefully, if you're willing, you'll probably see it before anybody else as a proofreader. Jeff: What's the best way for folks to keep up with you online, to keep up is as 'Infernal Instruments' continues and this new contemporary book starts to take shape? Michael: If they go to my full name - MichaelVanceGurley.com. Go on there and there'll be links to my two book sites and to my Instagram, they can go to Captain Rhetoric on Instagram and find me, that's where I write self-involved book reviews where hopefully people care about what I think about these amazing books that I read, and travel pictures, and just little bits like that, not too much of me, just sort of what I see about the world. I like to do that on Instagram and that's the best way to keep up with me. Jeff: Well I wish you the best of success with 'Absolute Heart'. It's been great to talk to you a little bit about it. And when that contemporary is done you'll have to come on back. Book Reviews Here's the text of this week's book reviews: The Masterpiece by Bonnie Dee. Reviewed by Will.The Masterpiece by Bonnie Dee is a makeover story with Pygmalionthemes in a historical setting. Essentially, an irresistible gay version of My Fair Lady. The story centers on a guy named Arthur. He is the well-to-do gentleman in this particular scenario and, one day, he's out enjoying the good life with his bestie, a guy named Granville. Occasionally Arthur calls Granville, “Granny” and it totally cracked me up. Granville believes very heavily in the British class system. Arthur is a little more modern in views. He feels that if a man has the wherewithal and can pull himself up by his bootstraps, he can achieve anything with his life, no matter where he was born on the ladder of social hierarchy. In order to prove their different theories, they set a wager, and that bet involves Joe the shoeshine boy. Arthur must make Joe a gentleman in six weeks. It is there that he will make his debut at the biggest party of the social season. Joe moves in with Arthur who is very glad that to realize that Joe is not only very smart and very kind, he is hardworking and interested in bettering himself. Joe is undertaking this particular makeover because he has dreams of owning his own men's shop one day - with a focus on finely crafted shoes. They get down to work and, after spending several days studying and learning which fork to use, they decide to get some fresh air. So they go for a constitutional in the park where they unfortunately run into Granville, who's like escorting some demure young ladies. Joe does very in his first unexpected like test. Arthur and Joe now realize that they have definite feelings for one another. Their next test comes during an evening at the theater where they unfortunately run into Granville yet again (this dude's everywhere). Granville has befriended a professor of linguistics, and Arthur knows that Granville is only befriending this schlub because he plans on bringing the linguist to the party to expose Joe as some sort of lower-class fraud. Joe handles the situation admirably. He's proving himself time and time again, but Granny is not going to give up. He makes sure that Arthur's family is invited to the big soiree, and his family comes to stay, making it nearly impossible to have any alone time with Joe. Finally, the big evening arrives and everything goes swimmingly. Joe is tested but everyone is really charmed and quite taken by him. When it comes to Pygmalionstories there is usually a point in the narrative where the Eliza Doolittle character has to wonder if the professor is in love with her, or the person that she's pretending to be. We kind of skip over that in this particular story because it's really obvious that Arthur and Joe are like completely into one another. What ends up happening is that Joe feels guilty, his conscious getting the better of him. All these lords and ladies and debutantes are remarkably kind to him, and he feels genuinely bad that he's pulling the wool over their eyes. That guilt eventually leads him to leave Arthur's house sooner, rather than later. Arthur and Joe try to figure out how can they make their relationship work, but they can’t. Even though they've essentially won the bet and they've proven their point, the fact is that the class system is still very much a thing and the two of them are from two different worlds. Joe packs his bags and leaves and Arthur ends up going to India. He has been convinced by his brother and his father that he has to finally grow up and take part in the family business. While he's away, Joe uses the money that he earns from the bet and opens his own shop. When Arthur finally arrives back in England, there's a big declaration of love scene because they realize they are both utterly and completely miserable without one another. And they both vow to find some way that they're going to make it work. I really, really loved this book an awful lot. I loved these two characters that Bonnie Dee created I was rooting for them the entire time. The Nobleman and the Spy by Bonnie Dee & Summer Devon. Reviewed by Jeff & Will.Jeff: Bonnie and Summer are both new to me authors. The Nobleman and the Spy, which I would call a second-chance romantic suspense historical, was a complete delight full of intrigue and some steaming hot sex. Solider-turned-British spy Jonathan Reese is assigned to keep watch over German Karl von Binder. Jonathan knows Karl all too well because during the war Karl spared Jonathan’s life. It doesn’t take much for Jonathan to lose focus on his mission and pay attention to the man who has come back into his life. He’s also aware that he cares too much for Karl to allow anything to happen to him, despite the fact that his orders as the mission begins are a bit mixed if he should allow the man to be killed or not. Karl, despite the forbidden attraction to Jonathan, tries to keep the spy at length, sure that he can protect himself. As evidence piles up though that there’s someone on Karl’s trail, the two end up working together trying to figure out who’s behind it. It’s a tangled web that I didn’t quite believe even as it was all falling into place. The resolution was certainly something I’d never anticipated as I tried to solve it as I read along. It was quite a thrill. I loved the feel of this book. In often reminded me of a childhood favorite TV show, Wild Wild West, which was set in the same time period of the mid 1860s. While this isn’t set in the American west with some strange characters as villains, the time period comes through loud and clear in a rich setting and how the characters carry themselves. I also liked how Karl and Jonathan recognized that they couldn't give in to their attraction but the more they couldn't give into it the more they really want to. And then when they got together it was so intense. Narrator Todd Scott I have to say does a terrific job with the entire story but the sex scenes…off the charts! Will: What really struck me and what I enjoyed the most is that it's essentially a bodyguard trope and it has all the different things that go along with that but in a historical setting. So it was sexy and it was fun and there's lots of adventure and action. I really enjoyed this one as well. Jeff: Calling out the bodyguard trope is really appropriate. But what makes it a little different, at least to me, is that Karl doesn't really want to be guarded. But Jonathan certainly takes that role because he keeps reinserting himself even where he's taken off the case. He wants to keep Karl safe at all costs. So, yes, we both highly recommend The Nobleman and the Spy by Bonnie Dee and Summer Devon.

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Ep#8 Scaling to 7000 units within 5 Years with Michael Becker

Play Episode Listen Later Jun 25, 2019 54:13

James: Hi listeners, welcome to Achieve Wealth Podcast. Achieve Wealth Podcast True Value in Real Estate Investing focuses on key players in valuable estate investing specifically on Commercial Real Estate asset class. Today we have Michael Becker who has done more than 7,200 units, primarily, I believe in the Dallas area, I know Michael can help me fix that. But you know, he has done a lot of deals in the past few years that he has been investing. Hey, Michael, welcome to the show.  Michael: Thanks for having me. Appreciate it.  James: Good, good. Can you tell the listeners about things that I missed out about your credentials? Michael: Yeah. So, Michael Becker, I'm based in Dallas, Texas and I'm a banker by profession. That's kind of how I got into the business was loaning money to other people and went out on my own about six years ago now, so about six years of experience. And as we talk right now, we're just closing up our 34th and 35th acquisition. So puts us about 70 to 100 units that we've done in our career. So far we going full cycle on 16 deals. So we refinanced three out, return some Capital still own and we sold 13 of them. So as we talk, we currently own about 5,000 apartment units, the vast majority of those are up here in Dallas Fort Worth, which is where I'm based. We have 400 units in Tyler and then we have 900 units in the Austin markets. So we're Texas-based focused, predominately on Dallas Fort Worth and Austin for where we look to buy. James: Awesome. Awesome. So rarely, I get to interview someone who has come from, you know, brokerage business and also the landing site, right? But I always wonder why Brokers and lenders who lend money and trade deals never really become the buyer or the owner of the assets, right? So what was your triggering Aha moment that you said, hey, I should better just, you know, go on the other side of the table here and start buying deals rather than lend money? Michael:  Yeah to be a banker, you have to have a certain like mindset and generally pretty conservative and if you start becoming successful like I was as a banker making a lot of loans, they try to tie you in the bank by giving you stock options and have more investing period so it's kind of the longer you wait, the harder it is to leave. But for me, I was 35 when I left the bank, I'm 40 now, and we're just like this little fork in the road, I felt that if I stuck around it was going to be that much harder to go. And really what I did was this all day every day was making loans to other people like yourself that would be a buyer, distress deal, renovate and sell it for big profits and I kind of realized I was on the wrong side of all those deals. It's better to be the borrower than a lender.  And you know a lot of great clients, a lot of them are friends, my friends still to this day, and I was looking at a lot of them and I was like thinking myself like if that guy can do it, I definitely could do it. You know, not that they're not smart. But what I like about the business it's a really, really simple business at its core; it's not always easy to execute but it's pretty simple to understand. So I had a lot of connections, had a lot of experience, you know, I underwrote deal after deal after deal, I knew everyone in Dallas Fort Worth, I was in the industry. I just wasn't doing anything about it.  So I met my business partner, Shawn, back when I was at the bank and he was helping people out of California buy properties in Texas. I made a loan to them. And so, he was kind of sick of working for his boss the broker and I was sick of working for my boss at the bank and so we kind of went out on our own. And like I said, we're probably the second or third most active B classifier in Dallas Fort Worth and the current market cycle. So we've been pretty active here in Dallas Forth Worth.  James: Got it. Got it. That's interesting. I always wonder, I mean, what do the Brokers and lenders see in themselves that they want to continue doing that rather than owning an asset? Michael:  You know, when you think about it though, like as a banker, you don't have any money at risk, you got other people's money at risk, you got your clients' money, you got the bank's money and you know for you to go tie up a deal, especially today, I mean, you posted up six figures in earnest money or God forbid, you know, well north of that hard earnest money day one and get all this like Risk and then you got to go out and raise, syndicate the capital. So to take that to do what we do for a living, you got to have a certain amount of guts to go out and do that because you know, you're taking a calculated risk along the way and you don't have a paycheck. So if you don't do business you don't get paid. So that's a certain minority of people in the world I can go on and take that type of risk on and thrive and if you go out setting cases up like I do, you just have to be comfortable taking that kind of risk. And on top of that, you know, most of the stuff is on recourse, where you still sign and carve out. Some bankers get pretty, pretty nervous about signing, you know, I have 4- 500 million in debt right now so I mean that's a lot of money, you know, and to try to take that mentality, it's just a different type of mindset for sure.  James: Yeah, I guess the entrepreneurship mindset and whether you want to do it, I mean, especially if you have gone through the last crash in 2008, you can be very scared.  Michael: That's right, for sure. James:  So let's come back to how did you scale up to this large portfolio, right? Because I used to listen to your podcast when I started in this multifamily investing in 2015. When I was listening, I know you had like, first year in[05:47unintelligible] you had like 1000 units and now you have like 7,000 units, right? I mean maybe now you own like 5,000 units, but what was the system's process if you put back yourself back into that time and I know you made mistakes from then until now but you know, what are the teams or what are the processes and who would you hire first to grow to this scale? Because now it seems like clockwork for you because you guys have been... Michael: Yeah, so we started out, it was pretty lean. So when we first started out, I did the first four deals, first 800 units. I still worked at the bank and then I kind of had enough scale that I felt like I could you know, keep going. I had enough credibility in the market place; you buy one deal, you get a lot of credibility. You buy four like quickly everyone in town knows you're out there buying it because like I mentioned, I had a lot of resources like from the standpoint like all I did, all day, was underwrite apartment loans. I had a lot of connections to a lot of people. What was holding me back was that everyone thought of Michael Becker as a banker, they didn't think of me as a principal so I had to kind of change the perception in the marketplace what I was from a banker to a principal. So once I did that, that changed it pretty quick and then from there, we sort of started to scale. And so it was my partner Sean and I and we had one employee when we started. We kind of did a little bit everything and we all do a little bit everything when you're that kind of small. And so, you know, we were just kind of guys who were doing deals and then all of a sudden we woke up. I think we had seven or eight deals and we had all this work on us and there was still just three guys out there doing deals. So we had to figure out how to systematize so we started out with someone that's got an IT project management background experience actually, so she came in and kind of did operation; we were disorganized with stuff everywhere. So like our Dropbox wasn't orderly, you know, just wasn't everything wasn't save down. We didn't have any documentation of processes and procedures. So she came in the systematically, you know by meeting with me for two hours at a time., she'll talk about whatever, interview me and systematically built out all our policies and procedures and organize everything. You know, our chaos for life got real organized over a six to a 12-month period from there. Then we added an analyst to kind of help on top of it. And then we started layering in an administrative help on top of that and then you know, we start getting Asset Management help, hired a professional asset manager and then you know, we hired transaction people to kind of help run process the escrow and things like that. So those are the types of teams, you know, we have a third-party management company. I think you're vertically integrated when you do management in-house.  So we're able to manage 5,000 units with nine people; basically my partner and I and seven employees. We've got ahead and taken the approach. So I want to hire really high-quality people, pay them a little bit more money, but just be a little bit leaner. So that's kind of the approach we've taken because I really don't like managing people. So the lesser quality people will take a lot more of my resources so I rather pay someone that's a killer really high salaries and trust they can go out and do the job. But you know, admin help is the first thing I think you need. Someone to make sure you get organized. You have a process, make sure you get an investor database. Be really helpful, if you do syndication dropboxes, so we use dropbox all the time.  You'll have internal chat systems. Those are things that kind of we can do quick little messaging, you know, all sorts of stuff like I talk about, about raising money more efficiently if you want to go down that path or if you want to talk about operation, we talked about that too. But just trying to use technology and work smarter not harder. And every time we do a deal, at the end of the deal, we always have a Post-mortem meeting where we go over the good and the bad and we take away lessons that were bad and then we take those and try to improve the process for the next deal.  And when we first started out, they were a lot of bigger issues and now, fortunately, the issues are really small and minor because we got the list of stuff you don't ever want to do again list, got really long pretty quick and try not to make the same mistake willingly twice. James: Yeah, so can you name like top three things that you have realized from that not to do list, can you share it with the listeners?  Michael: I mean around raising capital in particular, you know, we first started out, we had a database and I needed to raise a million. I remember I had to raise a million four for a deal, I think it was a million five something like that. And it took me about 20 25 people somewhere in that range to get a million five in, a hundred thousand minimum. We first started out I'd get a package. I need be able to an investor. I set up a call and have an hour-long call, 45 minutes to an hour long call and I had to do that 25 times. Now, what will do is we'll email the list, we hit schedule webinar and it's at, you know, seven o'clock Central Time on Wednesday. People that can attend Live, great. If not, we'll send them a recording of the webinar. And then they can watch the webinar when they want to and then I have a five-minute call with them if I need to resolve. So I presented all the materials of the deal so maybe a lot more efficient that way. Whereas, you start scaling up doing like webinars a lot more efficient way to present your opportunity than one on one calls. Because, for example, we just finish up with 24.6 million dollar equity raised and if I had to do that one call at a time like that is so huge, you can't do that. It's going to be 200 people basically invested to get 24.6 million. So, you know, you'd have to have 300 calls to get that and that just isn't an efficient way of doing it. So, that'd be one thing.  Another thing that's been official, as I said we got an investor database. So when you invest with us, you go to our database or portal up our website you fill your stuff in electronically and you electronically sign your documents. And that's a much easier way of going about it and getting the old school, paperwork out, that's kind of how we started. And then finally what was another good way to be able to work efficiently. You know, I think we got more efficient the way we've kind of work it and keep people in line and we clearly communicate what's expected of people and we're really consistent with it. So those are things you grow into, those aren't things you necessarily have money to do out the gate because we, you know, spent a couple of thousand bucks a month on our investor database. So if you have zero units to spend $24,000 a year on a database doesn't make sense. But you know, gotowebinar is certainly something you can do and you can use a Google sheet instead of a set of a database until you ultimately get enough revenue where you can afford some of the more technology tools that are available out there.  James: Yeah, yeah. In fact, I just launched my investor database yesterday, which was a lot of my investors love it. They just say it's so nice for them to see their dashboard, in terms of investment because a lot of them have multiple investments with me and it's just nice for them to see. And all the documents are in one place and they can just log in and get the report. They just love it. Michael: And it'll help you when it comes to tax time to track all your distribution in there, I'm sure and then you don't have to go recall your distributions at the end of the year to do your K1s. James: Got it. So coming to I mean you must have a good number size of passive investors. I mean, how do you select certain passive investors for certain deals? I mean is it first come first serve or how is that? Yeah, so we have, let's see, I did 900K1s last year. I think I had about 500 unique investors when we closed the year out. We just raised, I'm not quite sure what the stats are of how many are a repeat, how many are new but I probably have 600 unique investors who've literally invest with me at this point in time. And we're going to do 12-1300K1s  next year easily. So yeah, we generally will so we definitely have like a blacklist, right? So if we take your money and you're a pain, we'll make sure we don't take your money again. That's certainly the thing I think everyone should do that for sure.  On the front end if we think you're going to be a pain we'll generally kind of blacklist you as well, life's too short. Yeah, too many people, we don't have time to have a little distraction. But basically when we have an offering, we'll just go in the database and you'll get together like the MailChimp will send out a little, hey, coming soon email or save the date email, got a future opportunity coming up and then you just email the database and just generally first come, first serve.  Sometimes we have a couple of guys that we know that we have a special situation with that. They're like, hey, I have this money. I want to place it with you. Maybe we'll give them a little bit of a head start to deal from time to time. But generally, send it out first for people to pay attention, fill the paperwork out, get it all done, wire the money in, those are the ones that get into the deal. James: Yeah. I mean, I agree with some investors being a pain. I mean, it's just so hard to win. Especially sponsors like us. I mean, there's so much of moving parts and so much hard money in and on day one, I mean, so much money stuck on escrow and this has so many things going on in closing a deal. And there will be some people we just had to deal with it, right? Michael:  Yeah, so, you know, it wasn't the vast majority, people are great and but you know, one of the things that I was talking with one of my buddies, he's syndicating his first or second deal, yesterday, and he was getting a little frustrated, it wasn't going quicker and I'm like well just because you have a deal in escrow and you have a deadline and it's important to you, doesn't mean that it's not as important to investors, but they have other stuff going on their lives. So you got to be able to make sure you meet your deadlines. So you got to consistently communicate deadlines and be proactively reaching out to people and you know, you gotta push sometimes to get these people. Because if you don't stay in front of them, they're going to get distracted and something else in life is going to come up and they'll just simply forget that, you know read about your deal. They don't mean to and it's kind of like happens.   James: Yeah. Yeah, I always communicate as well to make sure that everybody knows the timeline and when do we expect things and keep on communicating to them because everybody's working on getting things done, the passive investor, the sponsors and all that. So that's important. And so the type of deal nowadays that you're doing because usually I mean, I'm not sure whether you know, I wrote a book called Passive Investing in Commercial Real Estate where I categorize three different types of deal, which one is core, the other ones are light value add the other ones a deep value add. So the type of deal that you're doing, can you describe those characteristics? Michael: Yeah. So when we first started out, we bought a whole lot of[16:37unintelligible] that's kind of generally where we started out that's where most people start out. So the first probably ten deals may be more raw 1960s 1970s vintage stuff and then about two years into the business, we started to transition more in the B-class. So Texas, things like the 1980s vintage. And then really the last two to three years the vast majority of what we have done had been kind of more B plus, A-minus. So things kind of like late 90s all the way to about 2008; that's kind of my most favorite part of the market, as we sit right now.  We have done a couple of brand new deals. We had some exchanged money, we sold a BDO and we just bought a brand-new 17:16unintelligible]  and then we bought a few deals a little bit older than the 90s. But generally speaking, if you ask me, A-minus is my favorite space and a couple of reasons for that. Now one, if you go back when I first I bought my first apartment 2013, I bought a brand new class A Deal in Dallas for about a 5 cap, a BDO was like six and a quarter six and a half cap and a CDO was like eight, eight and a half cap. Fast forward to today an ADO is like a 475, a BDO is like a 5 and the CDO like five and a quarter by five and a half, something like that, right? So what used to be a big gap is now really, really narrow.  So we have the ability to track larger amounts of capital. So it make as much sense to me to be on a risk-adjusted return basis to buy a 1970s piece of crap building if I can buy a 2004 vintage building for a similar cap rate. So that's kind of what we're focusing on. And the stuff that was built that's 15 years old, stuff kind of on the 2000s. Still, most of those have like white appliances and cheap light fixtures and you know, no backsplash and you know cheap cabinet fronts. You still do similar value add things like flooring, appliances, fixtures, backsplash, cabinet fronts and still push the rent lift up a hundred dollars or maybe more per unit by doing the work. So that's kind of my favorite part on the market and then just kind of we've been fortunate enough to have a couple of deals go full cycle and return a bunch of capital. So we have a lot of money in our database and so I can't simply go raise two or three million dollars, that's just too small, you know, we need to be raising, you know, nine ten million time minimum; it's just too small. So we're just trying to do a little bit of a larger deal. And that's kind of what we've been focused on and say light value add, A-minus that's the vast majority of what we do with a couple like more newer stabilized kind of deals then thrown them in if we do an exchange or we just think we're getting a good basis on a deal. James: Got it. Got it. And also the other thing that I mentioned the book is the passive investors will be, they would like to invest based on their preference or based on their investment cycle. So when you look at your passive investor demographic, do you see some differentiation in terms of these are the group of people that like to invest in my deal?  Michael: Yeah, I mean, listen with 700 different people that invested with us you get a little bit of everything, right? You know, but that's one of the things that we always try to make sure we stress is you know, hey, here's what to expect. You know, we're really explicit about what the projections are, the timing and amount and the timing of the cash flow and when you do a syndication, ultimately most of those things need to sell at some point. It's hard to keep a whole bunch of unrelated people to together for perpetuity; forever is not a good hold in a syndication environment. That's cool if it's like you or you and a partner or a really small group of people, but when you have, you know, a hundred unrelated people that's hard. So we want to make sure when we're communicating with them that--and they understand like, you know what to expect and I also let them know if we're going to sell it and it doesn't fit what your objectives are, then this isn't a good thing for you to invest in.  So we try to be really explicit. So we match expectations properly because what I don't want is a year down the road, for you to be upset because you thought you were investing in, you know, one thing and there's really something different so, you know trying to be explicitly and very clear to our investors is what we're trying to do.  James: Yeah, that's good. That's the best way to just make sure that everybody knows what they're getting into right? So with the market at the current cycle right now, I mean in DFW Austin, you know, the whole taxes or places where you're investing it's very hot right now so, where do you think we are right now and how your strategy has changed in terms of acquisition? Michael: Yeah, I mean. You know, this has been a hell of a run where we're nine years into this thing or something like that. I mean, it's been one hell of a run. You know, with that said, the more we focus on a predominately Austin which is where you live in Dallas which is where I live and if you look at the population projections about three weeks ago, I've done this with staff about three weeks ago. The Census Bureau came out and kind of have stats for the growth 2018. So Dallas, Fort Worth from 2010 through 2018 over an 8 year period, there are a million more people in here in 2018 that was in 2010. So, we went from that 6 and a half million people to about 7 and a half million people and their projections in Dallas Fort Worth are to grow from about 7 and a half million people to almost 10 somewhere between the next 12 to 15 years. So to put that in perspective that's about two and a half million more people coming to Dallas, Fort Worth if the projections are right. So that's the equivalent of like the entire metropolitan area of Charlotte or Orlando and then putting it on top of Dallas, Fort Worth today. And everything I just quoted to you about Dallas, if you take the percentages, it's even higher in Austin. So Austin is growing even faster on a percentage basis. If you feel like just driving around, there are just more cars, more people all that. So I don't know a whole lot, James, but I know if the equivalent of the entire metropolitan area, Charlotte is put on top of Dallas Fort Worth[22:50unintelligible] have to go higher right? They just have to go higher. So what we want to do is, you know, make sure that we're focusing on the right locations within the metropolitan area. You know, we're trying to buy away from these Supply the best we can. We're buying like Suburban multifamily deals in better school districts. We're trying to focus on basis. So we're trying not to pay Crazy Prices. One of the strategies we've done here recently is focused on properties that you can come buy and assume someone else's mortgage and you get this avoids having a large yield maintenance or the [23:24unintelligible] prepayment penalty. So you get a pass along a lower cost to you as a buyer. So that's a way to kind of counteract that a little bit.  What you give up as a buyer; you give up five years of interest only on the front end as you're assuming a mortgage that's most likely already amortizing so kind of hurt you up from yield. But if you save a million dollars or two million dollars in basis, you know, one day, that's going to burn down if you need to sell it or refinance it free and clear. So that's one strategy we've been doing. And then here's another thing. I mean you own a bunch of stuff to San Antonio like those we were talking about before we started recording. You know, this is one of the things I would say, it's completely unfair business, you know, a lot of it who you know, what you know, what chips you can trade. And you know, I own a lot of stuff in Dallas but I walk in the San Antonio, you know, you have more clout in San Antonio than I do, just because I don't own. So the Brokers are more apt to sell you something than someone that doesn't know that market. So we're at this point in the cycle doing 35 deals or some like that at this point, we know everybody, everyone knows us that our Brokers are players in town. So we get our unfair share deals. So, you know, we're looking at a lot of stuff and we're trying to be selective with it. It's also as far as strategy goes, you know, the lone assumption route has been something that's been successful for us. And then two, we put up a lot of hard money. That is the other thing that helps.  So you can put up a lot of hard money, get aggressive with your terms, you know, act quickly, you know, we got a deal in escrow that we officially never got to tour, you know, so we had to go shop it and then we never got to tour it and so we just basically got it in escrow went hard [25:10unintelligible]  without ever having an official tour and I can do that because I've done 30 something deals. You don't do that on your first deal. So I know what's up, I know what's going on and we did our due diligence and we didn't find anything that we didn't already expect. So we knew what to expect and that's what experience and repetition gives you a psyche. I got my 10,000 hours and I kind of know what's going on. I kept having to make better decisions, quicker with that level of experience.  James: Yeah and brokers love it too because for them is like you're a very easy buyer because you already know the submarket. You're not going to give a surprise and they have done deals with you. They just love it things to go much smoother. They make money as well. So they love the repeat buyers and the local players, as well. Michael: Yeah, that's right. And then we're all friends like we go and have drinks together we go to the baseball game together. We all become friends and you know people do business with people they know like and Trust so being local in the markets that we own and operate in. I was at lunch before this podcast and ran from the[26:17unintelligible] Brokers because of their office across the street from me. Walking down the street and you ended up having lunch in these just randomly. And as I was walking out, one of my competitors who own like 12,000 units whose office is around the corner for me walked across me in the hallway, you know, and on the sidewalk, I mean so this like being proximity and doing a lot of deals that stuff helps. James: Got it. Got it. So let's say nowadays, what's the process of your firm looking at a deal? So let's say today there's a deal coming. I mean, it's not on the market, the broker tells you, who looks at it first, how does it come to your eyesight before?  Michael: Yeah. The way we are set up, a deal comes in, say I get it, you know comes across my desk. You know, I basically kind of where's it located? You know, what's the basic price? Right? So I'll just kind of go to Google Map. Make sure you kind of know the location I'm in and I know whatever location that they are sending us. Like we know like the markets because we're in the market. So, you know, usually, most of the deals are like, no, it's the wrong location or no, you're prices are extremely insane. I'm not paying that price per unit for this type of product. And so usually a lot of people kind of get kicked out, but if it passes kind of that basic high-level test, then at that point usually we'll do like a real get the financial statements in from the seller. And then what we'll do like a real back of the envelope analysis.  We'll spend 20 to 30 minutes doing a real high-level underwriting just to make sure that it kind of passes the high-level test and usually a lot of those deals die right then. So, you know, the deal was just like, you know the match it doesn't work. It's just way too expensive or we don't think there's not much upside in the rinse. Just whatever it is. We kick a lot of deals out that way. Then if it passes that deal usually at that point, we'll do a full underwriting and that will take this like four hours. You know, we have a CFA that's our analysts. Our analyst will go underwrite the deal for four hours. Since it's my partner and I, then my partner will go through and kind of review the model. And once you review the model, it passes that, then, you know usually, most of the deals kind of die right there then they don't really work. But the deals that kind of pass that screening that's when you know, we'll kind of get down and get serious about it. And I think that point that's usually when I go tour. So that point, they pass all the tests so we set up a tour maybe put [28:34unintelligible]  in early kind of depends on the situation. And so, you know, we're looking at you know, 60 70 deals to get one that actually makes something like that. That's probably somewhere in that kind of General ratio is what we look at. And we just have like little series of check marks along the way that we gotta like, you know, but doesn't pass this one little test and let's just kill a deal and move on. I found on the biggest cost to have in my life anymore, stop tuning cost. So if I spent a lot of time on one thing it's at the expense of something else. So my time is precious. So just trying to make sure I get, you know, use that the most widely and don't chase these deals for you know weeks and weeks. I never had the opportunity of actually making it in a day. So that's hard to do when you're first starting out and that's a lot easier to do when you have some experience.  So when you start out, you got to learn these lessons sometimes the hard way. You got to underwrite this deal that if you would have just at the end of it just kind of be self-reflective like, you know, what could I have seen earlier on this deal that would have stopped me from wasting a week of my life on it? You know, you need to start that. I think that's what separates a better apartment owner, ownership syndication type groups from the less successful ones.  James: Yeah, I agree. I mean, I don't look at more than five parameters in any P&L to decide whether I want to dig deeper. So what's the ratio of deals that you look at verses you looking at and passing it to your analyst for the four hours underwriting? Michael:  I mean, it's probably pretty limited. So if it's called 60 deals to get one, I mean it's probably, at least half just get killed or your pricing is way too high or it's the wrong location or the deal too small or something physically about the deal I don't like. So that's probably half of them and the ones I've been going to like get a back-of-the-envelope, we probably kill, you know, the 30 that make it through on the 60 we're probably killing, you know, so that's 20 right there. Then we'll probably underwrite, you know, ten to get the one type of thing.  James: What do you look for in a location?  Michael: You know, yeah, so we're Suburban multi Family Guy. So good Suburban location that is in the better school districts, you know near major thoroughfares preferably to have access to Lifestyle and Retail amenities like, you know, like they are near a Starbucks, near a good grocery store, you know, retail restaurant, stuff that people want to live in. First and foremost, low-crime area too, I don't want to buy in the hood. So, you know, no low-crime area. Those are the things I look for and we're targeting, you know, preferably 200 plus unit, A-minus family deals, but that's kind of my perfect deals. An A-minus deal with more than 10% or an upside, you know it's well located, low crime, better School District, near employers, near retail and restaurant. That's kind of what I look for.   James: So, can we go a bit more deeper into the back of napkin underwriting? So, let's say there's a $10 million deal you know, 50 unit, maybe a 100-unit deal, how did you underwrite that? Back of the Napkin. Michael: I mean, so what is the first major metric is a, you know, one other [inaudible31:51} ransom what's our basic market survey say . So, pull a [inaudible] and look at the market rent. So then how much upside do we have in rent? So, I say, so, if there's only 5% upside in rents then it's probably not ideal for us, you know, we typically 10 plus percent in upside of rent to make the mass work. So, if I only have 5%, I know when I layer in my sponsorship compensation it's just not going to make sense. All right, so you know, like it's just not going to have no margin for us to be able to go attract capital. So, that's the first thing and then we'll then obviously go down and like other income or other income opportunities, then obviously look at the expenses as well. Michael: So, you know, one of the deals were we just got awarded, the payroll is by 1600 ,1650 a unit and it should be 1200, you know, so we can on day one, boom, take 450 out of payroll that certainly helps quite a bit. So, we're looking for things like that, that's kind of what it is. And you know, basically for maybe if you think about it at its simplest form, James, like, I need to do a deal I need to be able to deliver somewhere between 13 to 15% IRR today that's what takes me to attract capital. So if I can't get a deal layer in my compensation layer in whatever capital you need to do, um, you know, talk to the purchase price and I don't have enough upside of rents because at the end of the day, if I can't produce a 14% or 15% IRR over a five year hold period, my investors don't want to invest. So, I can't spend time on deals on can produce those types of returns. So, we're just trying to find, stuff that has enough upsides would be able to produce that. So, whatever that is, reducing expenses, increasing income, the two most common things, or is there some sort of way we can get a different type of debt quotes that may be kind of juices, some of these returns or whatever the specific situation is to that property. That's kind of what we're trying to get to the heart because, if I can't produce a 14 or 15% return, I need to shoot the deal and move on. James: Got It, got It. So, coming to 13,14% IRR is it to investors, or is it overall returns on ... Michael: Investors right. So, if it’s like 15 investors 17 and a half, 18 to the deal and you put a sponsor comp in there? So, it's got to be, I gross 8 total 18 they get up 15 and our structure or something, something like that. James: Got It, got It. Yeah. It's interesting on the debt code side, no, sorry, before I go there, how do you know that the seller is not taking some of your upside? Because nowadays that's what sellers do, right? They price it slightly higher; they give you upside, but they price it higher, which erases your upside. So how do you determine that? Michael: That's the whole thing why we don’t buy c class anymore because of the same catch, so yeah you know, that's the thing so I mean, all these deals that have a lot of upside have a lot more interest and so they can again, bit up and the cap rates are compressing. So, the trick is you got to overpay a little bit, but you can't overpay too much. Right. James: Right. Michael: And that's kind of like what you're doing. So, at the end of the day I got to, I, it's as simple as I deliver a 15 IRR and if I can't deliver, I can pay up to a certain price and then you start doing past out price and I can produce the returns I need. And that's kind of when we back off. James: Okay. Michael: So that's kind of how I think about it, so, every, most of the deals we'll work out at a price. So, we just kind of get to where this is the Max price what we can do to push to push out a 15 IRR for investors. And so that works up to 20 million and 20 million, 100,000 it doesn't work. So, you got to kind of draw the line in the sand and have a lot of arms in the fire. You get a whole bunch of deals working all at the same time. Usually, they start popping. James: Yes, yes, yes. The basis of my question is because they could be $150 or hundred dollars a rent bump potential, but the seller has priced it so much or we could have outbid-- Michael: Yes. James: --so much that it's not worth it, right. So, to do that because you might be just getting-- Michael: Yes, there's that. And then you get a little nervous for some of the less-- the newer people in the business, with little less experience like you're going to pay a five cap for 19 C class, 1917 deal. Okay, location and suburban St. Tonio or Dallas or whatever and then you're going to perform like a five and a half or five 75 extra cap. Five years down the road for a c class deal, maybe that, maybe that's the right cap rate, maybe it's not, it needs-- as you go and improve the property, you're able to increase rents and by extension, you value you’re in a why. But at the same time, the more upside you take out of these deals because your turnover, 50% units upgrade them, shrinks your buyer pool cause everyone wants value add. So, the more value you take out on the deal, your cap rate actually goes up. So, it's like a weird little dynamic you're in that you got to like, you got to factor in. It's like a 3-D puzzle you're doing because what's great because you're increasing, you're why. Because you're raising your rent, but at the same time you're also expanding your cap rate, as we sit in the same marketplace. So, it's interesting, complex puzzle, the marketplaces are right now. James: Yes, I was talking to a broker and you say hottest deal to sell nowadays it’s like deals where everything is done right, 90% is done. Michael: Yes. James: Nobody really wants it because everybody wants value add right? Michael: That's probably the opportunity to go buy a bunch of that stuff. Cause that's what today is. And then if you can get higher leverage loan, you get a 75% loan and get a good low-interest rate and get a bunch of I Own and go buy a deal that's turnkey. Maybe that's a better way of going, to be honest with you. And just kind of get a little bit more your return from current yield versus a big pop on the backend. That's thought about strategy, to be honest with you, it's a lot more safer than going and doing a bunch of work on a property-- James: Yes. Michael: --and paying a 475 cap for 1970 deal. I'd rather pay a six and a quarter cap for six and a half cap for a deal that's already done. James: Yes, because the backend is not certain. Right. Nobody knows what's going to happen-- Michael: Right. James: --at the [inaudible37:58] cap rate, so. Michael: That's right. James: So that brings to my next-- Michael: And then you do all the work, you might expand your cap rate anyways. And then you're doing all this work to only get half the payment. So, I think if I could go back in time, I would've bought every deal on a bridge loan. I would not have spent a single dollar in renovations and just operate it, wait five years and you sell it in today's environment for like a freaking 475 cap, that would have been a better decision with the benefit of hindsight. James: Yes, correct. Correct. So how would you-- sorry, in terms of cash flow vs. IRR vs. Equity multiply, right? So, what do you see, what is the most important number that-- for you, right, I know you're passive investors need to look at? Michael: Yes. You know, I think everyone, that everyone's different too. Like, all my investors have different things that are most important to them. I think, honestly at the end of the day, a pair of this investment, that investment, IRR is really kind of the driven. I'm not the biggest IRR in our store. We, I think the cash on cash certainly matters because I can't pay my bills on IRR, but I can with a check every month. So, I, that certainly protects it. But at the end of the day, really, we're focused kind of when we're-- comparing this, it's up to you in the next one, really kind of IRR. Because you know, if I'm able to come in this deal, I assume a mortgage and refinance in the third year or something like that and have a partial return of capital that pops my IRR pretty, pretty good. And I keep take some of this capital and return to my investors quickly. Two-year period, you know, 30% of their money back through a refi or something like that. That certainly is attractive. So, we'll, I think I kind of focused on IRR when I'm making the decisions on which deal, I want to buy, which deal I don't. And we've been, we like [inaudible39:54], we've been focused many deals about loan assumptions recently trying to get a lower basis. So, the first and foremost I'm focused on basis, making sure I buy a deal that's a relative value to everything else is trading right now. And I, cause I was only two things. You can't change on a property; you can't change your purchase price and you can't change location of it. Everything else you can kind of modify can always refinance it. I can always improve the property, but I can't change what price I paid or where it's located. So, we'll locate a deal with good prices, and I think everything else will kind of generally work itself out. James: Got It. And got it. How do you make decent between buy and hold for long term vs. buy and buy and refi? How do you decide? Michael: Yes, so if it's a syndicated deal, we've done a couple deals, especially when it first started out doing dentures where it's like what equity partner in us. Those deals we tend to hold longer. We bought a bunch of workforces, we sold them, we exchange, like A-minus or a product. So, we did a bunch of that. And then when it's a syndication people for like forever is not a good whole period if you're in syndication. Because people want, return on their money as well as return of their money and kind of the intermediate term. So, we're typically performing a five-year hold period. I think you'd be going much past seven. Most people kind of like, you know, shoot, I don't want to tie my money up for 10 years or 20 years. Now I kind of want to get my, I kind of want to see a return of my money as well as the return on my money. So, it kind of depends on the thing, but that's a heck of a lot of work buying and selling these things. So, it was just a lot easier just to kind of hold and it's kind of operate, especially the way we're set up with a third-party management company that does all day today. I, managing a bunch of thousands of apartment units. It's kind of like adult daycare. James: Yes, it's adult daycare, it's a good one to see. Michael: It's property management as a business of problems. I mean, there's always a problem, like every day, always, problems everywhere. So, if you have third-party management to kind of oversee that and we're set up and I have an asset manager that layered in between me and them. As a principal, the way we're set up, it's really not that bad on the day today. So, what we've been kind of focusing on is we're just selling the older stuff and buying newer, nicer stuff. Cause there's old stuff, I mean, not only, it was great, and we made a bunch of money, but you have asphalt parking lots and casts on sewers and t one 11 siding, Hardie. You go renovate a deal and two or three years later you've got to renovate the deal because the parking lot needs to be redone and you painted over wood. So, then you've got to have more wood of what, right? You got to go paint over again. And you can't cast, our sewers are collapsed in every time you turn around and get, dig it up and replaced sexting sewer pipe. So, you have all these like nonrecurring items that recurrent all the time. So, doesn't impact in a live per se, but it impacts your actual cash and the bottom line? So, I'm so I think the actual net cash you can pay out, it's not that different on a higher cap rate, older deal versus, or maybe a little bit lower cap rate, better quality deal if you're going to be in these deals for a long period of time. So, we've been just trying to get younger in our portfolio, so stuff I owned a day, I'd be much more likely to want to hold than the stuff I owned in 2014, 2013 cause those were just tougher, older, older deals. And I think that's what I've seen been kind of like the natural progression of most people that do what I do for a living. Just over time. One of the things, one of my mentors told me once when I first got in the business was, you own apartments in dog years, and every year of ownership feels like seven. So, like over time, you know that statement is very, very true. The older the property and the smaller the property, the more true that statement is. The bigger, nicer. It's just easy, just easier. So, I don't know if I answered your question,-- James: [inaudible43:42]. Michael: --but those are the-- between owning or selling a deal. James: Absolutely. Absolutely. And-- so let's go back to a bit more personal stuff, right? So, can you name like three things that you think is your secret sauce in, scaling up to this level? Michael: Yes, so, first and foremost, I mean I'm pretty tenacious and I had a lot of ambition, so, that was, that was a lot of it, right? I was like, I was willing to do what it takes to get to where I got. So, we had a lot of experience, background, and training and that certainly, so first and foremost, I just really, really, really wanted it. And like last weekend I flew to Jacksonville, not check, yes, Jacksonville, Florida, I'm sorry. Losing track of where I was. So, I was in Jacksonville for 21 hours. I spoke in front of 300 potential investors. I flew back home. I did that Saturday morning, came back Sunday morning and three weeks earlier I was in Newark, New Jersey, went to some hotel conference room on a Saturday, came back on Sunday. So, I'm willing to sacrifice a good chunk of my weekend to go out and get in front of investors so I can then do these larger deals. So, if you're not willing to put in the work and do what it takes and you're only, you're going to get a moderate your success for sure. Second thing was, I had a great background being a banker for over a decade and I just did deal after deal after deal. So, I've got a great education on my, on the bank Stein. So, most people don't have that. Cause then they're not bankers. Right. But, go get educated. That's the other thing I would, I would say get educated, higher from a reputable mentor. There's a lot of people out there put the time in. Become a student of your craft, go listen to this podcast, or listen to our podcasts, read books, do stuff like that. That’s a great way of learning. These podcasts are great. Like we host the Dole Capitol podcasts or your podcast. You're going to sit here and talk to me. So, it looks like about at least 45 minutes here- James: Yes. Michael: --at this point. And you get to your conversation from two guys that own almost 10,000 units collectively for 45 minutes for free. And there's a lot of wisdom and nuggets, but I think hopefully you can take out of that. Um, so, my background, my education was certainly it. And then really just a lot of its just relationships. You know what I mean? A lot of this is as simple as just don't be a jerk. That's, that's a lot of it, right? So, the brokers want to do business with people they know, like, and trust. They want you to be honest with them. They want you to be, do what you say you're going to do. And if you could just do that and be in a good guy and be friendly with them, man that goes a long way. It really does. So those are, those are three things I've done pretty well in this business. James: Got it, got it. And why do you do, what you do, I mean, where are you? Michael: I understood back, couple of things, right? To have a better life to be able to, the monetary if you'd have done well, the very rewarding monetarily. I sit back, so I got a couple of things happen, reflecting back on this, cause you know, we've done a lot in a short period of time. When I was 2010, so my mother passed away in 2010. So, I was like 32, I'm 32, 31, something like that at the time. And, so she was like 57 when at the time she passed away and then she-- her and my father sacrificed to save all their life to then be able to retire one day and then go have all those great traveling adventures in the sunlight and do stuff that was great in life and she didn't get to do that. She works to sacrificed and saved and I never got to-- the fruits of it. So, I kind of, that was a thing that kind of burned into my mind that I need to be able to do something young, unable to take a risk young. So, then I can then enjoy a lot of stuff in life. So shortly after, that's when I really first started was in 2011. I bought a bunch of rent houses in 2011. I [inaudible 47:28] my mom passed away and that's kind of really when I started like taking risks and doing stuff because being a banker, you're just naturally conservative. You're not really wanting to go take risks. But I started small and kind of got some confidence and then a transition in the multifamily. So that was one thing. And then, and then when I was about 34, 35, I was sitting at the bank and I worked for a large, large national bank and then, I was really successful, and they're kept trying to promote me. And, when I was looking at the bank and I looked at my boss and my boss's boss and his boss and thinking about what they do all day, it was kind of depressing, to be honest with you. Like I didn't want to do that. And I felt like a, it is a metaphorical thing, but it felt like a little fork in the road. Like I'm 34, 35 and if I don't go out and take a chance like right now, and I wait one more year, every year is, we made a little bit harder to go out and take this risk. But if I like go out right now, I saw the market, the market was right. Capital was blowing and the deals are so good. And I knew that because I was in the industry. So, I was like, if I go out and I fail I can always come back and be a banker because I was a really good banker and I can, y'all are going to need to be a banker. But if I go out and I succeed, then I can have a great life and get to go to Hawaii for three weeks. Like I'm going to this summer, I'm just going to pick up the family in Hawaii for three weeks. I'm just going to work from Hawaii for three weeks to sort of be in a hundred degrees in Dallas. Right. So that's what you, that's what I get to do today. And I get to pay for my sister and her family to go to Hawaii because we've taken the risk and been successful and those are-- that's kind of, I guess some of my whys right there. James: Yes. It's, it's interesting on how you're tenacious. I mean, whether its real estate or anything. And you can do this in anything, right to, you just have to be-- Michael: Yes. James: --persistent in doing it and know your why and just push it. And I can change your life. Right? So. Michael: In every transaction, there's always a problem, right. James: Yes. Michael: So that's the thing too. And that's what I always fall back on. Like there's always a problem. There's always stress, there's always, whatever. And you just got to like push through who's going to put your head down. You just got to push through. Just kind of will it, so do what you needed to do, you know? And not that every time I feel frustrated and you were not getting a deal, right? Like I've gone months and months on a deal, I just do more. Like, you know, I make more calls, I go do this, I'm proactive. I'm just like more always answer. So, we don't get what you want to do. More effort, not, that's usually, usually tends to work out pretty good for me. James: Good. Good. We're coming to the end. One more question. Do you have any like a daily habit or daily ritual that you do that contributes to your success or effectiveness in life? Michael: I'm not the most, I don't really read a lot of books. I don't really meditate on do any of that. So, what-- I, I do find myself from time to time, I'll go down the rabbit hole of doing something and like burn off 30 minutes by all my life around the internet or something like that in the middle of the day. And I always try to catch myself and say, okay, like I just need to prioritize. So, I have a hundred things to do every single day and I need to ensure I know what the most impactful thing is. And I focus my time on that. Cause, sometimes you let the tyranny of the urgent get in the way of the important. So just cause I have 40 emails on red, I need to go clear. It doesn't mean that's the most important thing for me to do right then. Even though that's like dinging on my screen in front of me. Sometimes I'll try to shut that out, focus on what are, what is the most important thing. And then I know when I, I'll schedule time to come back and clear my emails out an hour later down the road when I kind of get done the most important thing. Because, if you're in a Sproul, I'll leave you with, it's kind of, there's this whole thing that I've, I've definitely learned in this business, as a syndicator, as someone that does, find that puts together an apartment operators, apartment investment opportunities or any sort of opportunity like that. The best way you make, the way you make money in this business, you've got to find deals and find money. Going to find deals and find money and everything else is sort of noise. It’s all really important. You got to operate; you've got to do all their things right. But, that doesn't really, that's not driving revenue. So, if you want to focus on revenue, you've got to find deals or find money. So, I'm not talking to brokers, I'm not talking to my investors, you know, everything else is, not driving revenue. So, at the end of the day, I always try to remember that when I'm deciding, what do I spend my time on. Do I spend my time on this or that, that's always in the back of my mind? James: Got it. Got it. Is there anything else that you want to share in this podcast that you have not shared in hundreds of other podcasts that you have been? I should have [inaudible51:57]. Michael: I, I think, we do a pretty good job. So, I would, if you want to know more about me, I think really there's a couple of ways you can, the easiest way to find me, just get my company's website, which is a company spiadvisory, just go to our website www.spiadvisory.com. It's spi like spy advisory dot com. There's a contact us form, fill that out. I always happen to have in 10 or 15 minutes. A telephone call, listeners of the podcast. You guys are interested in maybe working with us or really the best way if you want to know more about me or if you listen to this podcast or [inaudible] or. So, you can listen to a dual capital podcast. So that's on iTunes or Stitcher or YouTube or anywhere you're probably listening to me right now. You can find the old capital real estate investing podcast. So, we have probably 300 episodes in the archive or more at this point. So, we do interviews with other people kind of similar to this format. As well as we do a little short one where my partner Paul interviews me and asked me one question a week and I answered about one specific topic. So, if you want to know anything about and just all-around apartment investing in your or some form or fashion. So you want to learn more about me, that's a good way to kind of-- I talk, I have a lot of stuff recorded that's out there that, but if you like this, you may, you may like that and hopefully can provide some, a little nub. It nuggets on different little talk topics, to listen to those. James: Yes. Yes. I learned a lot from you. I mean, listening to you from different, different podcasts throughout my apartment investing journey. So, I'm thankful for that. And I think that's it. Hopefully, all the audience and listeners got the value that they want to get or getting from Michael and myself. I think that's it. Thank you. Michael: All right. Thank you.

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17 #InvisibleMan : Black Leadership in Corporate America

Living Corporate

Play Episode Listen Later Aug 24, 2018 54:29

We discuss the idea of being a black executive in Corporate America with Frost Bank President Michael Williams.Michael Williams' LinkedInHelp Beat Triple Negative DCIS Breast CancerTRANSCRIPTZach: It was a dream job, the type of assignment that could make or break the career of an ambitious executive with an eye towards the top. "It was my first big promotion," says Bernard J. Tyson, the 57-year-old CEO of Kaiser Permanente, a health care company with nearly $60 billion in annual revenue. The year was 1992, and Tyson, then in his early thirties, had been named administrator of one of Kaiser's newest hospitals in Santa Rosa, California. "Everyone knew this was the hospital to lead," he says. His physician partner, an elderly white gentleman named Dr. Richard Stein, was less excited by the news. "It was one of those "Guess who's coming to dinner?" sort of welcomes," Tyson recalls, and it went downhill from there. The two men were constantly at odds, unable to collaborate, with most conversations ending in angry standoffs. "He would say something, and I would react," says Tyson. "It was the most difficult relationship I have ever had." Failure seemed inevitable. One day, Stein invited Tyson for a walk. "He said, "I have to confess something to you, something that may end our relationship,"" Tyson recalls. "I have never worked with a black man like this." He meant as a peer. Stein, it seems, didn't know what to say, to act, what to expect. Tyson saw it for the opening it was. "It was this moment I realized the majority of the population doesn't have any sort of mental road map for how to relate to and work with someone different from themselves." This is an excerpt from Why Race and Culture Matter in the C-Suite, an article written by Ellen McGirt, for Fortune Magazine, and I believe it highlights the reality many people of color in leadership face every day. Being in spaces where few of us are present is challenging enough, but compounding that with the task of leading teams, as in telling them what to do? How does one succeed in that environment? Further, what does success even look like? This is Zach, and you're listening to Living Corporate.Zach: So today we're talking about what it means to be a leader of people while also being a person of color in Corporate America.Ade: Yeah. So to be honest, I usually get so focused on making sure that I'm good in my career and navigating all the nonsense involved with making sure that my individual contributions are recognized. I usually don't even think about what it means to lead a team full of people who don't look, think, or behave like I do.Zach: I know, right? And to your point, all of those things you just mentioned, they're critical and of course very important and really don't change as you become a leader, but it's interesting because when you look at that article that I read by Ellen McGirt, it highlights Bernard Tyson's experience about white men having to engage him as a equal. So I'm a manager, so I'm not an executive. I'm not a CEO. Nothing fancy like that. I'm the manager, but even as my managerial experience, I can say that beyond leading a team, being in a position where folks who would typically have to--or typically would overlook me actually have to submit to listening to my ideas and my proposals and my direction. It's been a really interesting experience. Ade: Hm. So I hear you, I get your point, but do you perhaps have any examples for us?Zach: For sure. So a few years ago I was working on a project where I was dealing with a manager, and I was telling them what the approach should be for a specific task. I was walking them through the methodology and just the reason and rationale behind why we were gonna make this approach, and as I'm talking to him his face starts just turning bright red. Ade: What? [laughs]Zach: Yeah. [laughs] Like, it's like he ate, like, a habanero pepper or a ghost pepper, and he's trying to hold it in that it's not spicy. Like, he doesn't want anyone to know it's spicy, right? So he's just sitting in there, and his head is shaking, and he's got a little vein bulging out the side of his head. I'm like--Ade: What in the world?Zach: I know! And so I'm talking to him, and I'm just kind of--I'm just having my normal--I'm not talking at him, right? I'm just talking to him. I'm having a normal exchange, and I'm trying to, like, keep up the same casual cadence of my talk while seeing him clearly, clearly be uncomfortable.Ade: Huh. So I'm just curious. Like, was there anyone else in the room who saw this? Who, like, witnessed what was going on and pointing it out?Zach: Yeah. So I was in the room, then my manager was in the room, and he was in the room of course. So they saw this the whole time, and it wasn't like a one-time occurrence, right? So for those folks listening like, "Well, maybe it was just a one-time thing. Maybe he had a hard day." He had multiple hard days, okay? Ade: [laughs] It be like that sometimes.Zach: [laughs] Right? It happened so many times. It happened, like, literally every time we spoke. We spoke once a week for, like, two months, two or three months, and I'm like, "This happens every single time." So now--even when I spoke to my manager about it, I'm like, "Hey, are you noticing this?" Like, "Do you see what's happening here?" You know, she was even reluctant to admit and acknowledge, like, "Oh, I do notice this," and so why she was so uncomfortable talking about the situation and why she was even more reticent to talk to other people about the situation, including, like, our project manager, is for another podcast, but needless to say it was pretty weird.Ade: Okay. Well, I know that you've had experiences as a manager. I personally have not. I am, like we've said multiple times, at the beginning of my career, but wouldn't it be great if we had someone on the show who had about 20 years of experience as an executive within the finance industry, which--Zach: 20 years?Ade: 20. I would argue that the finance industry is one of the most politically-charged spaces, but you didn't hear that from me. So I'm not sure. I feel like it would be good if we had someone who has had to climb multiple ladders, maybe build coalitions of support, maybe who has had active participation as a leader in his community and has acted as a mentor to other people of color.Zach: Hm. You mean like--wait a minute, let me check my notes--you mean like our guest Michael Williams?Ade and Zach: Whaaaat?Zach: [imitating air horns]Ade: Never gonna get tired of that. [laughs] All right, so next we're going to get into our interview with our guest Michael Williams. Hope you guys enjoy.Zach: And we're back. And as Ade said, we have Michael Williams on the show. Michael, thank you for joining us. Welcome to the pod, man.Michael: Man, thank you so much for inviting me.Zach: Absolutely. So for those of us who don't know you, would you mind sharing a little bit about your background?Michael: Sure, sure. I guess--where to start? I'm originally from Dallas, but I moved here and attended Texas Southern University and the University of Houston. Met my wife, who is an only child, and guess what? I was gonna stay a Houstonian. So after school--I had always wanted to be in banking, so I started down that line of pursuing a career in banking, and I have not looked back since. I guess it's been going on 27 years. 26, 27 years. Somewhere in there. I need to do the math. It's in there.Zach: [laughing] That's awesome. So when did you first start leading and managing teams in Corporate America?Michael: So I've been leading a team of corporate bankers for about eight years now, and I actually--for the bank I'm currently employed, I actually am what's called a market president. I run the entire [Southwood?] side for the bank. So I have a team of 13 commercial lenders that work directly for me, and the way we're structured, while I don't do anything in the branches, I have three branches--excuse me, five branches where my people are located, but all of those individuals have a dotted line responsibility under me as well. So while I in effect manage 13 directly, I have actually management I guess authority for somewhere over about 40, 45 people.Zach: Wow, that's amazing. So, you know, this show we're talking about--we're talking about leading while black, and so can you explain a bit for the audience--and shoot, for myself as well--the difference between being a manager and being an executive? And in your career, how do you manage that shift?Michael: Sure, sure. You know, it's--one of the things I continue to do is just aspire to read. I'm an avid reader, and I've read many books on not only how to manage but also--frankly, if someone would have told me management was more about managing the people relative to how they coexist, I would've actually got--instead of getting a degree in finance, I would've gotten a degree in psychology, because really that's where the buck stops. If you can understand that you have influence as a manager, you can easily--and I don't mean just regular influence. I mean you have to understand that everything you do has the ability to set the table up for your future, and those decisions that you make, you need to be calculating because you have the ability to influence people without you even knowing it. And so when I made the switch is when I decided to get an advocate for me at a senior level that allowed that person to see me and my skill set and be able to be my advocate above my pay grade to allow people to say, "Okay, this guy, he not only knows what he's doing, but he's also someone that we can actually incorporate into our senior management team."Zach: That's really interesting. Can you talk a little bit more about when you say advocate and really what you mean when you say advocate, and what were some of the things that they were able to do for you as you were able to transition into that next level of leadership?Michael: Sure. Here's the one thing we all have to--the people who--the vast majority of your audience needs to understand. As a minority--and I'm African-American, so as an African-American minority, the one thing that we don't have is direct access to the highest levels of any corporation, and in many instances, as it stands today, there are not gonna be a lot of people that look like us. And so I remember back when I was at another institution and there was one senior-level African-American gentleman there. That individual decided that it was in his own best interest not to uplift and promote and advocate for younger African-Americans. It was a sad--it was a sad sight to see. It was a very difficult experience to go through personally, but what I learned from that, I took away from that is I will never do that to anyone.Zach: Amen.Michael: Because people sitting back trying to figure out how to gain more ability--excuse me, more control and/or allow their skill set to show that they have the ability to be at the next table, and he would block them 100%.Zach: Wow.Michael: And so my career has been all about making sure that I help those coming behind me who have the requisite skill set and the requisite training. That's first and foremost. So in terms of--in terms of understanding your point, how you make that switch, the biggest thing is you need to--I said find an advocate, but you also, in my mind, have to bring people up behind you that are highly competent and qualified, and now you've got this team of people around you, and if you have that advocate, they see that and they want talent. They want talent absolutely. They just have not been used to having talent, and they certainly--in terms of African-American talent. So they don't necessarily embrace that, but what they do is they lead those people to the side to try to figure out who's on first, what's on second, and how you actually get to tell them you're on first and John is on second and Theodore is on third or whatever the case is is you have to embrace getting someone to get to know you. So in my--in my (life?) career, when I figured that out in my previous institution, I actually had the chairman of the bank--excuse me, the president of the bank here in Texas as my mentor. Today, I've got the president of the bank as my mentor. He is the #2 in the bank. We meet on a quarterly basis. I don't ask him for anything. I ask him for his time, and I want to share his--I want him to share his thoughts, and he wants to hear my thoughts about a various, just a various amount of things. It has nothing to do directly with "How do I get promoted?" "How do I do this?" It's all about just communication, because what I'm trying to do and what I have learned, if you break those walls down and are able to communicate, then that allows that person to see you as someone that they can feel comfortable with, and that really is the biggest barrier to any minority trying to break into the upper levels of executive management if it's not your company because they don't know us as a people, as a rule. All they do is listen to, unfortunately, Fox News and other similar detracting and negative news accounts about us as a people in general, and they make these generalizations without knowing you individually.Zach: We introed the show talking about and sharing a story from Bernard Tyson, who is the CEO of Kaiser Permanente, his experience in having to deal with individuals who had never worked with a black man as a peer. So I'm curious to know how many instances you've had where you've said, "Wow, you've clearly never worked with a black man before." Like, has that happened? And if so, would you mind sharing a story or two?Michael: Sure, sure. That has absolutely happened, and you could see it coming 100% down the line. It's amazing. I've had it happen so many times, but I remember a couple of different instances. I'll give you a couple stories. One, as a young analyst, you know, all of us who come through commercial lending, investment banking, all of these corporate-type lending groups, we all have to go through this vetting process and this training process, and it's generally about a year, and we'd learn all this stuff, and then we're out--we're put into these groups, and we're analysts, so we're at the bottom of the rung, right? We're [runts?]. And so I'm in this group, and this--[laughs] calling him a gentleman is good. It's way above where he was in [inaudible], however this gentleman ran the group, and this was--this was in the early '90s. And so this guy--to give you kind of just an overall view of who he is, this guy would smoke in his office. It was illegal to smoke inside of the building, but he would smoke in his office. But he was an old head, he was a successful old head, and senior management didn't bother him. So they let him smoke in his office. Well, okay. So this guy, the manager of group, he was clear that he did not like me, and he made himself clear by several different things that he did. And I'll give you one nice example. So I am in the habit of drinking a gallon of water today, and actually I still do that to this day, and I had my jug that had a lot of water in it, and we were in meetings, and he turns to me in front of everybody and says, "Why do you have all that water?" "Because I like to drink a lot of water." He said, "Well, you know what? That is so sophomoric of you. It's like you're a little kid with a jug." I was like, "Whoa. Okay, this is just water." So we go forward. I take that as a note and I keep moving. Of course I didn't get rid of my water. I just decided to hide it from him all of the time. So there was an instance where when we get into work in the morning we would go get something to eat for breakfast, 'cause typically we'd have to get in early, so we typically would get something to eat for breakfast. My counterpart, the young analyst that was with me, would go--she would check into the office, sit down, turn her computer on, and then go get something to eat. I would go get something to eat, come back, check in and sit down and get something--and start working. I was told that I was habitually late. Now, mind you, I got in before it was the normal working hours all of the time, but because I got breakfast first, came back to my desk, she came to her desk, checked in, meaning face time--and I'm using total air quotes right now--Zach: Right. [laughs]Michael: Meaning face time. It was acceptable to do what she was doing and unacceptable to do what I was doing, and these are very small, minor things, right? Well, one thing everyone needs to take away from anything--if you don't take anything else away from what I'm saying, it is absolutely this - you cannot progress, move up, move forward in any career unless management likes you. Period. Stop. End of story. You could be the most highly-qualified, the brightest--have the brightest mind, have the best work ethic, but if your manager does not like you you will not be able to move up. As a matter of fact, your job is in peril and you don't even know it.Zach: So that was when you were, you know, a new analyst. You were coming in. You were getting hired. You're working for the old head. Was there anybody--was there any instance or experience you had as a leader where you were like, "Wow. Okay, you've clearly never dealt with a person of color before." Michael: Oh, sure. Sure. So we're working on a very sizeable transaction, and my team is managing--I am managing my team, and it's one of my lender's opportunities, and this deal is north of $100 million, so it's gonna be a nice year--Zach: Whoa, whoa, whoa, whoa. Whoa, whoa, whoa. You said one zero zero million dollars?Michael: Yes, sir. Yes, sir. I do corporate lendings, so, I mean, I've worked on several significant-sized transactions for many publicly-traded companies in my past.Zach: Wow.Michael: So at any rate, this is gonna be our year. This deal is basically gonna make our year. So this is my deal. We're working on it, and unbeknownst to me there was some chatter in the background by a counterpart, so another manager, and this person made some questionable comments about me and my ability to lead us through the closing of this deal. I had never even interacted with this guy, so the things that he was saying about me and my inefficiencies. He went on about being efficient, not having ever done a deal of this size before, it actually needs to be done by him and his group. Zach: Wow.Michael: You know? And I sat back and I said, "Wow, interesting." For me, one of the things I'm real keen on is documentation, and so along the way of that particular process I was able to have my documentation in order so that the president, who was the final arbiter, came down to find out what was going on and why we were having some discord, and I simply said, "I'm not sure." And this is another nice little note here. Michelle Obama said it best. "When they go low, we go high." Never get into the mud when people are throwing mud at you. Never. Never. Because you will never win that situation as a minority. You will never win that situation. Even if you win that situation, you've lost. You've just lost because they're already afraid of you, they don't know you, and then now you've got quote-unquote real with somebody, oh, they don't want you around. They don't want you around. That scares the living crap out of them.Zach: But this is my thing. So Michael--like, for those--you know, I've known you, or at least I've known of you for a while, and so I know--but you are a keep it real type of dude, and you're definitely not, like, a back down kind of guy. So let's talk about this documentation and how you stood up for yourself, right? 'Cause I know that's not who you are, so let's keep it real, right? Like, let's--Michael: [laughs] Oh, you are so real with it, and I will admit 100% to have always been an enforcer. I'm just gonna be clear about that. I'm not gonna lie about who I am as a person. Zach: Amen. [laughs]Michael: I grew up--I didn't give you all of the background, but I grew up in the projects of south Dallas. So I grew up fighting. I know how to fight, man. That's not even a question. These hands are real good. These hands are real good. However, what I've--what I've learned over my career is that in order for me to be who I want to be--and now, maybe earlier on I probably would've put hands on him or done something that probably would have not allowed me to move forward as far as I have today, however he caught me at a time in my life where I know better, and I know that I am--my level of intelligence taught me early on, through my mistakes probably, but I wanted to be able to be smarter, more intelligent, and more calculating. I can't say that enough. Here's my phrase that I say all of the time. "I play chess, not checkers." And in life and in Corporate America, it's always chess. If you think you're playing checkers, you've just lost. It's always chess. You've got to think two to three steps ahead and why is that going on and why did that just happen? See, it just didn't happen for a reason. Something happened. And oh, by the way, there are multiple conversations going on without you even knowing about it. You don't even know conversations are happening and they're happening. So it's not about trying to be paranoid or being paranoid. It's all about realizing that they're having these conversations, making these judgments, making some assumptions about you without you even knowing about it. So go back to your question. I have always documented what's going on, and I've always done that to the point of understanding two things. One, it helps me to make sure I'm clear about what's going on, and then two, there's a little saying--although I've never been soothed, there's a little saying that says, "Everything is discoverable," meaning I look at--I look at every situation like there's a lawsuit pending, and as long as I'm looking at it like there's a lawsuit pending or this could promote a lawsuit, I make sure that not only am I keeping my ducks in a row, but I make sure I limit the things that I say that are a part of public record, be it in writing or orally, because I want to limit my exposure while documenting and keeping up with what everybody else is doing.Zach: See, the thing about it is I'm kind of--I'm kind of shook, to be honest with you. Right? [laughs] I'm kind of like, "Okay." Like, I'm listening to you, and honestly I'm hoping that my sound man puts a little bit of House of Cards type music in the background because I'm hearing what you're saying. I don't disagree, right? So this is just good information to have, and I'm a few rungs down the ladder, and so politically understanding how to navigate these spaces--and there are plenty of people who are listening to this show who are aspiring to get there. I'm curious though. We have folks in our spaces, and I think as you know when you look at the history of civil rights and just black liberation, you have to have allies. You have to have folks that don't look like you who are advocating for you. You talked about advocacy at the beginning of our interview. I'm curious to know--you know, there are people who do look like us, but there are people who don't look like us also who listen to this show who are passionate about diversity and inclusion, who are passionate about being supportive and really leading that next generation. What advice do you have, right, for our non-Wakandan brothers and sisters listening in?Michael: As I cross my arms and let my fists down.Zach: And bounce your shoulders a little bit. [laughs]Michael: [laughs] Right, bounce up a little bit. Let me tell you this. The thing that I can say is judge people--I mean, it's funny. MLK said it best. "Judge people for the content of their character, not for the color of their skin." Yes. Are there people out there that have--are trying to run a [gang?] Maybe not as qualified but have snuck into the door, yes, but guess what? That's on both sides. Zach: Hm.Michael: That is not exclusive to minorities, and in particular African-American minorities. That's on both sides of the equation. So judge people for their content, their capacity, and their intellect. That's how you--that's how someone with aspirations of being an advocate can do--get work in whatever their chosen field of human endeavor is, because there--first of all, there's not enough room at the top for everyone. Period. Stop. End of story. Full stop. However, people get passed over for reasons that, in a lot of instances, didn't have to be necessarily. But it happens because that's life, right? You know, life is truly Mike Tyson's big ol' heavy hands. It just keeps coming at you, and you're gonna get your butt knocked down, and you gotta figure out whether or not you can get up and/or have the will and the power to get up because they gonna come right back at you. Those people who get up, those people who have that fighting instinct, who are intelligent, who are hungry, those are the individuals. If you can just look at them for who they are and what they bring to the table, that's a good deal.Zach: Absolutely. I'm curious--I'm curious about this, kind of as a follow-up to really what you just said. You know, are there any--are there any specific experiences or points of advice you've received in your career that have stuck with you and really helped you drive and continue forward to the place where you are today?Michael: One, have that drive, have that inquisitive nature. Always ask the question. You don't ever know what the answer is, nor should you think you would know the answer, but you've got to be willing to ask the question. And once you ask the question? Oh, by the way, learn and don't repeat whatever it is you did before. Okay? So I'm a big one-time guy. Ask me the question or let me ask the question one time or tell me one time, I got it. I've got to move forward. Now, the responsibility thereafter is on me 'cause you told me. So now I want to demonstrate whatever it is. I have the capacity not only to remember what's supposed to happen here but to incorporate it into what I'm doing and move forward. That's one. Two, more important than anything else, never ever lose yourself. Whoever you are, it is you. God brought you into this world. Your experiences up to whatever that point is have made you who you are. Never lose yourself. Learn to navigate within the political world that we live in, especially in Corporate America, and refine your edges. Like you said, you've known me. You guessed that I was a fighter, [laughs] but I've learned to smooth my edges out and to be able to be--to walk in any room and strike up a conversation. Insert name here, insert title here puts his pants on every single day like I do, one leg at a time. So he's no more special than I am in that regard. All he has done is he has made himself or have been able to get the breaks to make himself--put himself in a leadership position. Maybe at the top of the company. Maybe at the next level. It doesn't matter. He's still a person who puts his clothes on--his pants on one leg at a time, therefore I have the ability to interact with this person and find maybe some level of commonness that would allow us to engage in conversation and then, again, continuing to erode any kind of preconceived notions and ideals about who I am simply because I showed up and my skin was a little bit darker than yours. Zach: This is just so helpful, Michael. Thank you so much for joining us today. Before we let you go though, do you have any plugs? Any shout outs?Michael: Oh, what could I shout out? I could shout out my wife's foundation. I lost my wife now seven years ago to breast cancer, and I started a foundation for her in an effort to help find a cure for this dreaded, horrible cancer called triple negative DCIS cancer. It is one of the most aggressive forms of breast cancer for--unfortunately for African-American women, and we have an annual walk to celebrate her life, but also to raise funds. We raise funds through corporate giving as well. The website is www.YEF.org, and that stands for Yolanda E. Williams Foundation. YEF.org. You can go on the site. We're preparing for our October walk now. The date has not been set. We will be doing that in a matter of weeks, and you can go on the site and check that out. And so my plug is help me figure out, through raising funds and donating to research, how to get rid of this scourge called triple negative DCIS breast cancer. I don't want anything else.Zach: Amen. So this is what we're gonna do. So first of all, we'll make sure that we have that website in our show notes, and we'll shout that out when we publish this, and then what we'll also do is when you confirm the date, Michael, let us know, and we'll make sure that we shout that out on the podcast as well.Michael: I will do just that.Zach: Okay. Well, first of all, just thank you so much for joining the call. I appreciate you joining the show. I appreciate the insights and just stories that you've been able to share. We wouldn't have had you on the show if we didn't know and trust that you would give us honest, frank, transparent conversation, and I believe we've had that today. We'd like to think you're a friend of the show, and I want to thank you again, and we hope to have you back real soon.Michael: I look forward to it.Zach: All right, Michael.Michael: Count me as a friend.Zach: I will. All right, now. Peace.Michael: All right. Thank you.Ade: And we're back. Zach, that was a great interview. One thing it did remind me of though was the fact that we interviewed a black man, but because the way the system is set up--you know, sexism, racism, and all of the other -isms--I believe that if we had had a black woman on the show talking about this we might've had a slightly different conversation due to the relationship of being a black woman in positions of authority.Zach: You know what, I agree. If you don't mind though, go ahead and expound on that.Ade: Right. So I'm sure you've heard of intersectionality, although for those of our listeners who haven't, it's simply the idea that there are--that your identity form different axes of the way you relate with the world, and so that means your relationships with the world and with certain aspects of the world such as Corporate America as a black man differs from mine as a black woman, and there are different aspects of that. So your sexuality also interacts with that. Your age interacts with that. Your class interacts with that. And so all of that said, I think that if we think about things like the angry black woman trope and how that would reflect in being a leader and how, for example, black women usually aren't allowed to get angry or to express dissatisfaction with anything, otherwise it's "Oh, she's so bitter. She's so angry," as opposed to "No, I'm rightly disappointed in your work product," and all the other ways in which that could affect, you know, the final outcome as a--as a leader. I definitely would like to have that conversation with a black woman in maybe a part two, you know?Zach: You know what? That's a good point, and I agree. Let's make sure that we get a part two on the schedule and get going on that.Ade: Most def. I definitely want to interview, like, an Oprah. Trying to get my auntie on the show. Maybe a Viola Davis. Let's see what we can pop on. How are you feeling?Zach: I feel great about that. You said a Viola Davis?Ade: Or an Oprah. You know, I'm not too picky.Zach: An Ava DuVernay, perhaps?Ade: Ava DuVer--see? [inaudible]Zach: Maybe an Issa Rae?Ade: Stop it. I have a girl crush on her. I have a crush crush on her, but I also have a girl crush on her.Zach: I have an artistic cross on Issa Rae for sure. I was gonna say Issa DuVernay, which would be an amazing combination if both of those, like, fused into one person. My gosh.Ade: Oh, my God. Think of awkward black girl but [shot by?]--[Sound Man throws in a swerve sound effect]Zach: What?Ade: [laughs] Okay, now we're going down different tangents. Okay, anyway. Today we have a listener letter, so as a reminder to everybody at home, we encourage conversation, and so we're looking forward to reading any letters, comments, questions from everyone. So let's get into it. So today we have this letter. We're gonna call this listener Nicole, and let's read Nicole's thoughts. Okay, so it says, "Hi, guys." Hi. "I love your podcast and your insightful advice. This is a career question." All right, let's go. "I usually don't ask anyone I don't personally know about advice, but when I told my circle of friends about this particular situation they were stumped. They didn't know what to say, so here we go. I've been at my job for close to three years, and I've adapted to the many changes that came within my department. A year in, I got switched to a different sector of my department, which meant that I was part of a team of two - the manager and I. My manager has been working with this company for close to ten years and is jaded by all of the politics that comes with working at a large company and in our department. She's much older than me and has been working in this particular industry for decades. My manager and I obviously make for a small department since it's just the two of us, but we're overloaded with work and last-minute projects, which sucks, but it's part of the inner workings of the culture. Anyway, very recently my manager was having a meeting with the director during which the convo switched to me. I was not attending the meeting, but my name came up. The director then asked my manager, "How are you expanding her role?" It seemed as though it was a slew of questions about my potential and what my manager was doing for me in order to make that happen. This didn't seem to go over too well. When I came back from lunch, my manager was venting to me about this meeting. She basically told the director that if she, being my manager, is unclear of her own role and didn't see how she could advance in the company, how could she advance me? And this is just a paraphrasing of the events. And so while she was venting I was simply nodding my head because what else could I say to someone who feels stuck in their job and is managing me? For someone who is much older, I thought she was gonna be a good example, but I've come to realize she isn't. Lately I've been looking for new jobs that pay better because even though my department seems to make millions for the higher-ups, they're stingy when it comes to raises. I've only received one raise, which equated to pennies in my paycheck." Pennies? Oh, Lord. Okay, all right. Anyway. "Should I hit the pavement looking for a new job that pays more or should I try to stick it out and work with my jaded manager? Thanks again, and I hope to get some encouraging advice. Nicole." My goodness. Okay, Nicole. There's so much happening here. I don't--I hate to sound like a typical situation, but this really did rock Zach and I when we gave this a first read-through. And so, Zach, if you don't mind, I'm just gonna go ahead and give my thoughts on it. Or did you want to go first?Zach: The floor is yours.Ade: Okay. So as I see it, there are, like, several different layers of suck here. I'm sorry that--first of all, I'm sorry that you're going through this. It's not a fun or funny situation when you feel as though your career is in the hands of someone who doesn't care about you, but like I said, there are several different layers, and I think it would be best to separate all of those things. So on the one hand, you have a situation where--and at the beginning of Living Corporate, we actually had--I believe it's our very first episode--where we were talking about separating your sponsors for your mentors, knowing the two and leveraging the two. Currently I believe what you need is a sponsor, not a mentor. Your current mentor isn't doing her job. And then the other issue is the matter of your money and getting a new job. So I'm just gonna address them one after the other. So I believe you need to go on the hunt for a sponsor, whether that is within your company, somebody who has a role that you eventually see yourself taking. So obviously this requires first figuring out what you want your trajectory to be at this current moment. That doesn't mean that it can't change, but I believe that everybody needs a five-year plan for themselves. And so in five years, where do you see yourself? In ten years, where do you see yourself? And find people who have optimized their career and go talk to them, whether it's within your company or without. Go on coffee dates. Hit people up on LinkedIn. And I promise you that's not a weird thing. I just came to realize that myself. Like, I'll hit up people on LinkedIn and just kind of ask them to go for coffee or, you know, get their thoughts on certain things. So that's one. The other is that, you know, I understand that you might be feeling hurt, but what your manager is going through is about her and not you, and so although it feels as though she's kind of set herself up as a barrier instead of helping you in your career, I wouldn't take that too personally. Don't let that reflect in your work. If anything, allow that to spur more conversations with, again, those sponsors that you're looking for because they're the ones--within your company, they're the ones who will be putting you on new projects, who will be putting you in places, in rooms, in situations where they feel you have the potential to progress. And outside of your company, those sponsors are the ones who will slide you those job links like, "Hey, I saw this come up. I think you'd be a perfect fit in this situation. What do you think? Go ahead and apply," which brings me to my next point. Any raise that's pennies per paycheck--Zach: Yeah. If that's literal then yeah, that's a pause-worthy statement.Ade: Yeah, that's not it. That's not the lifestyle that I'm hoping and praying for for all my people. I was actually just having this conversation with a group of my friends that closed mouths don't get fed, and it's very typical, particularly of people of color, particularly of women of color, to feel as though we should be grateful for, you know, the pennies as opposed to asking for the thousands, and I don't know if that's gonna, for you, look like--and this is all gonna be personal to you, whether you feel as though you need to be in this company and so you need to figure out how to have the conversation about raises or if you need to step outside and start looking for new jobs. And to that I would say optimize your LinkedIn, get your resume together. If you need to find a professional to look at your resume for you or if, again, those sponsors that you're looking for can take a look at your resume and help you in that regard. But I would definitely say you should start networking. Go to industry events. So whatever your industry is, Meetup is a really good place to find organizations or groups where you can network and meet people and kind of--if you have business cards--give your business cards out, ask people out to coffee at those events. People there are open and willing to mentor you, but you just have to ask. And so those would be my two biggest recommendations for you, and definitely, definitely, definitely keep your head up because this is something that I can relate to personally, and I'm sure Zach has, in some form or fashion, been in a position where he's had to advocate for himself, but you are always your own best advocate, and so this is just a matter of fine-tuning the language and finding the people who are willing to listen to you. Zach, what you got?Zach: Yeah. I mean, one I absolutely agree with your point, right? With all the points that you've made. Ultimately, just to keep it a little bit more succinct, I think it comes down to two things. First of all, you are your best advocate, and then two it's your own career. So it's really one point, right? So you have a couple things here, right? So you have challenges internally where you have your manager who's a bit frustrated and jaded to the language that you're used to, and you now have concerns if they're going to be able to advocate for you. Well, like to what we've been saying, rejecting the premise that anyone else is responsible for advocating for you and that you own your career, it starts with you saying, "Okay, what is it that I want to achieve here?" And then just talking to people, knocking on doors inside your company and being like, "Look, this is what I want to do. This is how I want to do it. Can you help me?" And be comfortable with the people who say no. And they may say no by just flat out saying no. They may say no by just not following up. They may say no by some long-winded answer, but just be comfortable with the people saying no 'cause eventually you'll find someone saying yes. Now, if you can't find the yes internally then it is time to leave, and you already were talking about the fact that you're looking for--you're exploring another opportunity. So your salary--like, your salary is a personal problem. So what do I mean by that? Your salary is a personal problem, meaning you having an issue with your salary, that's an issue between you and you. So you need to figure out a way how you're gonna answer that question. So are you going to get put together a case internally and say, "Hey, look. This is the number I'm looking for because I haven't had a raise in this many years," or "I've only had this one raise," or whatever the case is, or are you going to find another job, right? So plenty of studies show that when it comes to job hunting, you know, you're gonna get a bigger bump transitioning away from a company than you are staying inside. And I'll--there might be people who argue or disagree with me on that. If you do, please send in a letter, send in your comments. And there's more to a job than just your salary, but my point is you have to figure out a way to address that for yourself, right? And, like, I'm not attacking you. I definitely understand where you're coming from. I've definitely been there, where I've got caught up in the illusion of waiting for people to advocate for me, but I realized that people only advocate for you as much as it helps themselves. And so your manager who has her frustrations and things of that nature, that's perfectly human, and she shouldn't be shamed for that. At the same time, that's not your problem. Your problem is how are you gonna make sure that you take care of yourself? So Nicole, like, we're really excited about you sending us another letter, like, letting us know what's going on. We definitely are praying for the best. There's definitely a lot going on for sure, but yeah, advocate for yourself. And we actually have an article dropping on Living Corporate soon about strategic self-advocacy, so keep an eye out for that. If you have any additional questions, just reach back out and we'll make sure to chop it up. Offline.Ade: And definitely thank you for writing us and trusting us with this. So that about wraps it up for our listener letter portion of the segment. As a reminder, we do encourage conversation, so please reach out if you have any questions, comments, or concerns for us.[segment break]Ade: All right, y'all. It is another episode of Favorite Things. So I have a confession actually, guys. Please, please, please keep this on the downlow, as I say this on a podcast. I had my first bite of mac and cheese recently. I know. I know.Zach: Your first bite? Like, you've just now--you've just now tried--Ade: I just--like, I literally just tried mac and cheese, and it was--and I feel like the only real reason that I liked it was because it was a seafood mac and cheese because I've always been really, really averse to cheese, but I've only recently started being okay with it. Like, it doesn't automatically make me nauseous. And so, like, I had my--my friend made--there was a kickback, and my friend made seafood mac and cheese, and I was like, "Seafood? I guess I can give it a shot." I don't know what that voice was. [laughs] But I gave it a shot and I ate it, and it was good. Like, it was really, really good, and I was like, "Hold on, wait a minute. Are you telling me that I've been missing out on deliciousness this whole time?" I was like, "No, this is probably a one-off. It's because of the seafood." And then I went to another event with friends, and my friend made just regular old mac and cheese, and I was like, "You know what? I'm gonna give it another shot," and it was astounding.Zach: [laughs] It was astounding?Ade: Astounding. Astounding. Are you kidding me? And so now I am mad that I have wasted all of these years of my life not eating cheese, specifically not eating mac and cheese, especially since I apparently make good mac and cheese, but I've never eaten it because I've always been afraid of what it does to my life afterwards--of what cheese does to my life. And so now I'm just trying to spend all this time, like, making up for lost time.Zach: With cheese.Ade: With mac and cheese, to be specific. Zach: With mac and cheese, to be specific. Okay. First of all, that's very funny. Ade: [laughs]Zach: Because mac and cheese is--first of all, it's just such a common dish from my perspective, right? But at the same time I'm excited for you, and I actually think what we should do is maybe add a fun segment from time to time just called Ade's Cheese, right? Like, where you try, like, a new cheese, right? So, like, maybe next time you try Gouda, and then another time you try feta. Ade: Actually--it's so funny you say that because I bought a smoked Gouda from the Amish [inaudible] market in my apartment, and it's in my fridge right now, okay?Zach: Okay. So okay, great. So look, let's take a note 'cause the next time--the next time we're together we'll bring up your review on Gouda. Ade: Look, listen. I actually already took a slice of it with some pepper jelly, and I want to fight every single one of my friends who did not inform me that cheese was this good.Zach: Right. Now, look, cheese is--cheese is good. Like, it's a seller for a reason.Ade: I want y'all to know that there's no way you love me and left me out of the secret for this long.Zach: Nah, see--actually, I challenge that, right? I challenge that because they could've been holding you back from cheese purely for the health reasons, right? Like, there's no--Ade: Nah, forget all that, because, like, they watch me eat three slices of cake and they actually encourage me. Like, "Here, have my slice of cake." Zach: Okay. Well, then I understand your frustration.Ade: See? Mm-hmm. They're not loyal. Not a single one of 'em. [laughs] My only other thing this week, it's a book called Perfect Peace by Daniel Black. So it's a book about what happens--there are several different themes. Part of it is gender. Part of it is, like, family betrayal. And so, like, the plot is it's this family in the rural south. Mama has six boys already, and she's pregnant with her seventh, and she, the whole time, is thinking, "Oh, this is gonna be my girl." She has a lot of issues surrounding her relationship with her mother, and so she wants to really, like, nurture a girl, a daughter. Turns out that she has a son, and so what she decides to do is raise her son as a daughter, and so she names this boy Perfect. Their family's called Peace. And so Perfect is raised, up until he's 8, as a girl. It's just this really, really gripping story about, like, love and family and what it means to--like, what gender means and what family means and what truth means and all of these other things, and you find yourself just, like, shocked every other page. But yeah, that's my favorite thing, and that was a whole lot, but I hope y'all take a look. What about you, Zach?Zach: Well, first of all, that's cool. We've got to make sure that we add Perfect Peace to our reading list.Ade: Oh, yeah.Zach: That's right. Make sure you check out our reading list. It's great. So sticking with my record of aggressive book titles, my favorite thing right now has to be this book I'm rereading called This Nonviolent Stuff'll Get You Killed by Charles Cobb. It explores the history of nonviolence during the civil rights era and its function. It also breaks down the history and culture of gun ownership for black people in America. It's a really interesting read. Academic while not being too heavy. It's just a really approachable book, and it's also on our reading list, so make sure you check that out.Ade: And that's our show. Thank you for joining us on the Living Corporate podcast. Make sure to follow us on Instagram at LivingCorporate, Twitter at LivingCorp_Pod, and subscribe to our newsletter through www.living-corporate.com. If you have a question you'd like us to answer and read on the show, please make sure you email us at livingcorporatepodcast@gmail.com. Also, don't forget to check out our Patreon at LivingCorporate as well. And that does it for this show. My name's Ade.Zach: And this has been Zach.Ade and Zach: Peace.Kiara: Living Corporate is a podcast by Living Corporate, LLC. Our logo was designed by David Dawkins. Our theme music was produced by Ken Brown. Additional music production by Antoine Franklin from Musical Elevation. Post-production is handled by Jeremy Jackson. Got a topic suggestion? Email us at livingcorporatepodcast@gmail.com. You can find us online on Twitter, Facebook, Instagram, and living-corporate.com. Thanks for listening. Stay tuned.

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Fast Cash From Selling Options in Overbought or Oversold Markets

Play Episode Listen Later Jul 9, 2018 30:16

July 2018 Podcast James Cordier and Michael Gross Michael: Hello everybody. This is Michael Gross of OptionSellers.com. I am here for your July Podcast. This month’s podcast will be in audio format. I’m here with head trader James Cordier. James, welcome to the show. James: Thank you very much, Michael. Always happy. Michael: Great. The topic of this month’s podcast is Fast Cash from Selling Options in Over-Bought or Over-Sold Markets. James, as you and I know, we’re not really in the business of looking for fast cash, but we’re more in the business of long-term investments. Every once in a while, when you’re selling options, there comes certain opportunities where there might be a place to sell the option and you see that time decay in just the first 30-60 days. Often times that can be when markets get to an extreme, like some markets we’re seeing now. Wouldn’t you agree with that? James: Michael, it’s interesting, we are very long-term investors. When we’re looking at seasonal positions or headlines that create a slightly shorter-term opportunity, then we do look at things like timing and certainly all the headlines going on right now with trade are probably offering some really good opportunities of the slightly shorter variety and we’re looking forward to taking advantage of those over the next 10 days or so. Michael: Great. I know, as you and I have been discussing, as are most investors right now, the big topic is trade tensions with China. I don’t know if we call it a trade war yet, but certainly having got some investors attention and pushing the stock market around. Maybe talk a little bit about how that’s affecting commodities right now. James: Michael, if this doesn’t turn into a trade war, this is the most well played game that I’ve ever seen between the U.S. and China. I mean, we are right to the brink of what could be quite a significant trade policy coming down the pike. It is definitely worrying some investors that are looking at certain parts of the global economy. Uncertainty is always not welcome. Anyone who is looking at investing for their company or inventories or what have you, when they see uncertainty they usually hold back and that is probably going to be swelling some economic growth globally if this doesn’t come to a head here in the next week or two. Michael: Okay. As most of you listeners know, as far as being an option seller, it doesn’t really matter to you which way the market or prices are moving, especially when you’re trading different uncorrelated commodities. Often times, situations like this can create opportunities and that’s what we’re going to talk a little bit about today. James, would you like to go ahead and move into our feature markets? James: Michael, certainly. Natural gas is one of the markets that are very near and dear to our hearts. In the very heart of winter and the very heart of summer, which is coming up relatively soon, we did take positions in natural gas much earlier this year, trying to sell put premium. We were fairly successful doing that. Generally, the market bottoms in winter and rallies into spring and the natural gas market did that. Right now, we are looking at a seasonality for natural gas. It has had a very nice rally over the last 3 months or so and basically a lot of headlines talk about the need for natural gas in summer for cooling homes and cooling businesses, of course. We think that’s quite overplayed. Generally speaking, when it’s extremely cold in the U.S. or throughout Europe, demand for natural gas does spike and that is real. As far as buying natural gas for summer cooling, I don’t think the numbers dive exactly. It takes approximately 25% of the natural gas to cool a home in the summer as it does to heat a home in the winter so, generally speaking, when natural gas rallies because the warmer temperatures are ahead, that’s usually something you want to fade. Of course, at that time, inventories are usually being built in a very big way. So, we’re looking at selling natural gas calls over the next 2-4 weeks to take advantage of that seasonal position. Michael: Yeah, you make a good point there, James. The seasonal tendency for natural gas used to get a little bit of a spike in summer and, yeah, you can but it seems like the tendency over the last 5-10 years seems to be more of, as they build that inventory into spring and summer as those supplies rise, it tends to just kind of overlook the summer demand for just the reason you mentioned. Now we’re seeing a seasonal where the seasonal prices tend to start declining in June and keep going right through fall so it appears they’re following that pattern right now. Now, we’re not at a particularly high level of natural gas supplies right now. From what I’m seeing we’re a little bit under where we typically are this time of year. Is that what you’re seeing as well? James: We are. Natural gas supplies in the U.S. are under the 5-year average and they’re below levels from last year, not a great amount, but what a lot of market participants are looking at is all the drilling all around the U.S. Of course, the bi-product of that is natural gas. A lot of investors and a lot of the analysts in natural gas feel that $3 natural gas is probably a fairly decent price considering that drillers are getting it for free as a bi-product. So, it used to be that natural gas was produced in the Gulf of Mexico in Louisiana, and when you had demand shocks it really moved the market a great deal. The beauty of option selling is that some of that volatility is still in the market even though we’re now producing natural gas all over the country. We have just massive fines in Oklahoma, Arizona, and Kansas, the Dakotas, Pennsylvania, Ohio. The supply is always going to be there for natural gas right now and taking advantage of small swings, up and down, during the year should be fruitful for selling options and that’s why we think selling calls over the next few weeks is probably going to be a very good idea. Michael: You know, James, you made several good points there. In talking about the seasonal tendency, when we go back to where you were talking about selling puts in the spring when we recommended that in the newsletter, prices have rallied almost 10% since that point. Now, with supplies building, as you said, it can start putting a little bit more pressure on the price of natural gas, at least that is what you’re expecting. We’re going back to Fast Cash from Selling Options in Over-Bought Markets… I think two points, and maybe you can hit on both of them, one is natural gas, as of at least a couple days ago, hit a pretty good level where it was and looked pretty over-bought, especially for this time of year when you have a seasonal. Technically, the market is over-bought, that tends to push those option premiums up higher to where they get to an over-valued level at some point, especially with a little jolt like that. Also, natural gas is probably one of the markets that would be least affected by any type of Chinese trade tariff. Would you agree with that? James: Michael, the natural gas market that we trade here in the United States is purely a domestic market right now. It’s not coffee, it’s not steel, it’s not sugar. Those are all world traded markets and the natural gas market is probably 99% influenced by the supply and demand that happens within the 50 states. Of all the markets that we follow, several won’t be affected by the tariffs and natural gas is definitely the bull’s-eye of the one that will probably deem what goes on with tariffs probably be the least of all of them that we follow. Michael: Okay. So, we’re here at the beginning of a potential seasonal downturn here, at least that’s what we might be looking for. When you talk about this, and for those of you listening, natural gas is the feature market in our upcoming July newsletter, which you can keep an eye out for. It should be out on or before the 1st of July in your mailbox or e-mail box. James, in that, you’re recommending taking a look at selling call strikes at the $4 or above level. Right now natural gas is under $3, so we’re looking at strikes at least 25% above the current market. So, you’re not really calling a top right here, what you’re saying is, “Hey, it’s a 3, it’s not going to go to 4, especially at a time of year where supplies are building.” James: Michael, it certainly does look like an opportunity. The natural gas market has risen off the lows that we spoke of earlier this year and the ones you just mentioned recently. Natural gas was down to $2.50 and $2.55 earlier this year. Right now it’s approximately $3 so it has had a decent rally. We’re looking at strikes at $4, $4.50, and $5 and we think that the time to probably jump into those positions is really soon. We have had a nice rally in natural gas. A lot of it is based off of the hot temperatures that we’ve had in the Midwest and the Northeast recently. I’m looking at the 14-28 day forecast and it cools off quite a bit. While I don’t make that big of a deal over the temperatures exactly, a lot of traders do. That’s why I think we got this rally and we really like selling it here right about this level that we’re at right now. Michael: We go back to what we’re talking about here… The Fast Cash in Over-Bought Markets. Even if you’re going out deeper out-of-the-money contracts, which you recommend going out to December and maybe even March contracts, if we do get a typical seasonal move, which there’s no guarantee that happens, but if the price does and we get a pretty decent price drop over the next 30-45 days, I’m guessing what the market is still looking a little bit over-bought, you could see some pretty significant decay in those options. Is that what you’re looking at as well? James: It is. The decay on these options that we’re considering would probably, if in fact natural gas does have a slight decline going into the 3rd and 4th quarter, we would expect these options to lose a great deal of their value well before the winter timeframe. So, we are probably anticipating decent decay where these options might start out at $600, might have a value of maybe $100-$200 before we even reach the winter season. As far as our looking at the market, that’s a relatively short position for us and we think the decay in selling these options over the next 60-90 days could be very good. Michael: Okay, good. And again, those of you interested in taking a look at this market and what James is describing here, you will want to take a look at the July Newsletter. It is in the premium sniper column there. James, let’s move into our second market, which is the soybean market. If you want to talk about a market affected by or potentially affected by a Chinese trading tariff, this would certainly be it. You have soybeans just off the rumors since President Trump announced he wanted to have another potential tariff on some Chinese products up to the tune of, I believe, it’s 200 billion… is that correct? James: That’s the latest that I’ve heard on the wire today, yes. Michael: Okay. If that has stoked fears that China is going to retaliate and put tariffs on U.S. products. Soybeans, one of the main markets that a lot of investors fear may be in the cross hairs because we export a lot of soybeans to China. Soybeans have declined sharply on these fears just in the last few weeks. That and the fact that planting has gone nearly perfectly in the Midwest. Right now, the weather is ideal so we’re looking at fundamentals but we’re also going to be looking at this China pressure, but you’re thinking they might have pressed, over-pressed, on the downside right now. James: Michael, it’s so interesting the gamesmanship taking place out of China right now is just being played to perfection. We certainly have the ability to see China import soybeans from other locations, of course, Argentina and Brazil. I think we spoke of that earlier this year. What’s so interesting is the amount of livestock that has to be fed both corn and soybeans. That will not change, but the brinkmanship coming out of China right now is excellent. I can’t believe I’m going to mention this, but here I go. There are elections coming up in the United States and with China playing the tariff card on soybeans and watching those markets just absolutely fall out of bed, that is going to certainly be a bit of an irritant to the Midwest and the great plains in the United States right before elections. Don’t think that these farming states don’t know that. We just saw soybeans fall practically 20% in value with corn and soybeans over the last 30 days on these tariff scares. The fact that soybeans are a global market and there’s only so many to go around, while we were bearish soybeans earlier this year, it really looks like that might be overdone on the downside. If this is simply brinksmanship and this is simply bargaining going on, this fall in soybeans, the fall in price is probably just about run its course. We were just pushing $11 on soybeans. Now they’re in the high $8’s. We think that this might be a good place to look at selling puts in the next week or two. Michael: You know, James, just to point out in your feature article in the Spring, you suggested investors selling calls in soybeans based on, one, the seasonality and, two, what you mention and you hit it right on the head, there was no guarantee China was going to put tariffs on U.S. soybeans but if they did or if people believe they were going to that would just be an added bonus for the trade and really sink soybean prices. It looks like you hit it right on the head. That is exactly what happened right in the middle of seasonality where soybean prices tend to decline anyways because when they wrap up harvest, that anxiety goes out of the market, prices tend to decline. They don’t tend to decline as much as they did this year and that looks like it’s right off that China fear, just like you said. You’re talking about the elections, there’s a possible factor that could mitigate that, but we’re also looking at the core fundamentals where we have ending stocks this year 385 million bushels projected for 18-19, next year. It’s not high but it’s substantially lower than we’ve been for the last couple of years. So, when you look at the longer-term fundamentals, we’re not that bearish. I think you’re right. It looks like the market probably overreacted here. If they would slap tariffs on do you think that would bring another leg down or do you think we may have already priced that, at least for the most part? James: Michael, this is truly speculation on my part, but I think all the leaders around the world agree that major tariffs that are being discussed right now are going to simply be detrimental to a lot of the economies. When you look at the locations like Japan and Europe, which are starting to slow already, so many of these nations and their economies are certainly in need of a strong U.S. economy and a strong Chinese economy. Without those they slow down. I’m starting to think that this is simply negotiating to hopefully get a better deal, I think, is what the administration is thinking. We really like the idea that soybeans are going to be in very good demand later this year. As livestock feeding continues, that has certainly not changed at all. As far as I can tell, we’re going to have record demand for soybeans this year and the beginning of next and this very steep fall-off is probably going to be a good selling opportunity for puts. In other words, taking a bullish position from these very low levels coming up quite soon. Michael: Yeah, that’s a great point, as well. Record global demand for soybeans this year and the market tends to be discounting that because it’s been all wrapped up in this China story. When you have record demand you have very little room for any type of weather error or weather problem developing. Right now, this market is pricing in a perfect harvest, it’s pricing in perfect weather, and they are just sinking the price. In addition to what you’re saying as far as maybe this whole China thing is a little bit overblown, I think the core fundamentals here are enough to prop it up at least from the levels it has been to the last couple of days. Just looks like a market that, when we’re talking about over-sold markets, this looks like an extreme example of that. James: You know, what we started out saying is headlines can often create slightly shorter-term opportunities. The headline right now with the potential tariff is certainly one of those. Record demand, that’s not about to change. The demand for production of livestock throughout Asia, that’s not changing, that’s only growing. Many metals and other soft commodities, these can be transfixed into using something else. Coffee supplies, we can use coffee supplies from 20 years ago. It winds up at Starbucks and McDonald’s and such. Cocoa supplies can be used from 15 years ago. Sugar can be stored for a decade. That’s not the case with soybeans and feeding livestock and, thus, there really is no alternative for corn and soybeans. That’s why we think these headlines are probably going to be an opportunity to be selling puts here pretty soon. Michael: Okay. One final point I wanted to hit on the soybean market, and you made this in your article this week on the soybean market, which is on the blog. If you’re listening and you’d like to read the article and James’ suggested trade, you can see that at www.OptionSellers.com/Blog. It is our soybean feature market this week. The point you made, James, is even if China slaps a tariff on U.S. soybeans, they still need the beans so they’re just going to have to go to Brazil or somewhere else, Argentina, to buy their soybeans. So, they’re still getting the soybeans there, the U.S. beans get cheaper and they become more attractive to other importers and it’s really just a shift of who’s buying from who, but on the overall global stage it doesn’t really have that big of an impact on soybean supply and demand. I think that’s a great point you made. James: Michael, that’s exactly right. Whether the soybeans from Argentina and Brazil and soybeans from the United States go to Europe, it really doesn’t matter. We’re still talking about the same global supply and the same global demand. At the end of the day, it really doesn’t matter which soybeans are going to what part of the world. It’s a supply factor and it’s a global market. I think that’s an excellent point that you made, as well. Michael: So, as far as the trade goes now, we’re talking about again Fast Cash from Option in an Over-Sold Market. As we said, this market definitely fits the definition of over-sold and I’m not necessarily calling a low there but you’re willing to go $1-$1.50 below the current price and sell puts. As far as a trading strategy goes, what are you looking at there? James: Michael, as long as the market is still considering record demand and they certainly are, that part hasn’t changed, as long as the U.S. is now going to be the main grocery supporter for soybeans as Argentina and Brazil runs out, we’re looking at selling puts and soybeans at levels that the market hasn’t traded in years. We’re looking at selling soybean puts around $7.80-$8 a bushel. We think that the market’s going to probably be in the low $9 to mid $9 level later on this year. That would be putting these puts out-of-the-money by 20-25% and I think that’s a really safe basket, if you will, for us to be outside of the money. As far as soybeans falling down to $8 or $7.80, that would be a real eye opener. That would really set up a long-term position to sell puts then even lower. We don’t think that’s going to happen and we really like the opportunity that we think it coming up at selling puts around the $8 level. Michael: As far as fast time decay, maybe and maybe not, but I’m of the opinion, and you tell me if you agree, that this market has gone so far in ignoring the weather, which has been ideal, but if you get one little weather blip this summer in Indiana or Illinois, I think the market is so oversold that you could easily see a $0.50-$1 rally in soybeans over a period of just a couple weeks. You know what it can get like in the summer. If that’s the case, you could get a pretty fast decay on these, as well. James: Michael, you mentioned just a short time ago that we have near ideal conditions in the Midwest, the growing regions of the United States. We will have a week or two of hot weather coming to Indiana or Ohio or Iowa this July and August and that’s all it takes. They show this ring of fire on weather maps later this summer and up go soybeans, probably $0.50 a bushel. Shortly after that, if in fact that happens, I think you’d see really rapid decay on the puts that we’re looking at selling at this $8 level. Michael: Of course, if you’re an option seller and you are selling puts down at the $7.80-$8 level that James is talking about, all these things we’re talking about don’t need to happen. The only thing you need to happen is for the price to stay above your strike. So, any of these scenarios could play out and, as an option seller, you still take the premium. So, that’s really why we sell options in the first place. There’s many ways to make money with it, there’s only one thing that can happen for you to lose and I know that’s why we started selling options in the first place, James. James: Michael, we’ve often said the market can go up, down, or sideways, just as long as it doesn’t exceed your strike price and, of course, there are a lot of books talking about how often they do expire worthless. You do keep the premium, you’re the house, and from time to time someone leaves the casino with a smile on their face, but often it’s upside down from that price. Michael: Of course, those of you listening, if you’d like to read more about our strategies, the strategy we recommend for selling options in commodities as an overall investment approach, you’ll want to pick up a copy of our book, The Complete Guide to Option Selling. It’s now in its third edition through McGraw-Hill. You can get it on our website at www.OptionSellers.com/Book. You’ll get it at a discount there, a lower price than you’ll get it on Amazon or at the bookstore. James, I think that’s it for this month. I think we’ve covered quite a lot of ground. If you’re and investor and you’re looking at these markets, certainly follow up on our blog where you’ll see the written parts of these or the newsletter. Take them on your own merit. We will be incorporating these into our trading plan for our managed portfolios this month. Speaking of managed portfolios, our waiting list is now out to September; however, we are still booking consultations through July and August for those September openings. So, if you are interested or thinking about opening an account, now is the time you’ll want to book your consultation. We’ll have those interviews and we’ll see if you match the profile for a client. James, as far as one final parting comment here, as far as this volatility goes that’s coming from the Chinese trade tariff worries, does that make it a better or a worse time to be selling options? James: Michael, once or twice a year inevitably there are headlines that create volatility. A couple years ago it was the talk of the Brexit, there was Switzerland leaving the Euro currency, it was 2 years ago the surprise election results. These headlines seem to come around once or twice a year and a lot of investors feel that while that type of uncertainty is something I don’t want to invest in, but that plays into our hands perfectly. The fundamentals of the markets that we follow change very in small fashion, you know, 1%-2% moves in commodities, but to listen to headlines it’s like the markets are moving a great deal. That plays right into our hands. We sell options so far out in time and so far out in price. We love headlines like this and tariff talks with China is just the second one for this year and we really enjoy having headlines like this. It causes uncertainty, it causes high premiums, and that is something that has been feeding us for the last several years. One or two headlines like this every year or two is just fine with me. Michael: All right. I hope everybody got something out of this month’s podcast that you can use or help you decide if option selling is a good strategy for you and your overall portfolio. Again, if you would like to book one of our remaining consultations in July or August, you can call the office at the main number… 800-346-1949 and speak with Rosemary. If you are calling from overseas, that number is 813-472-5760. You can also e-mail an inquiry at office@optionsellers.com. You’ll be able to hear this podcast on our blog but you can also subscribe to our YouTube channel and/or iTunes and hear it there. James, thank you for all your insights this month. James: Michael, it’s my pleasure. Michael: For everybody listening, have a great month of option selling. We will talk to you in 30 days. Thank you.

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103: React Components with Michael Jackson

The Frontside Podcast

Play Episode Listen Later Jun 14, 2018 48:51

In this episode, Michael Jackson of React Training and Rob DeLuca and Taras Mankovski of The Frontside talk about what is a component, and what a component is specifically in the context of React. They also discuss when it stops being a component and becomes something larger, how it has changed the way we develop UI, and thoughts on container and presentational components being synonyms for controller and view. References The Tweet that started it all Wil Wilsman: Does my application work in real life? Do you have opinions on this show? Want to hear about a specific topic in the future? Reach out to us at contact@frontside.io or on Twitter at @thefrontside. This show was produced by Mandy Moore, aka @therubyrep of DevReps, LLC. TRANSCRIPT: ROBERT: Hello, everyone. Welcome to Episode 103 of The Frontside Podcast. I'm Robert DeLuca, a developer here at the Frontside and I'll be today's episode host. We're going to be discussing what is a React component or what is a component with Michael Jackson. I'm pretty excited about this topic, a sort of off from a tweet that I sent out after a long workday, when it is something being called "component" because it was built with React components but it was more like a mini application? Then Michael replied to my tweet, as they're happening and he said, "What is your definition of a component?" which is exactly what we're going to be discussing today. I thought that was a really great question. With me, as a co-host is Taras Mankovski. TARAS: Hello, hello. I'm also a developer at Frontside. ROBERT: Before we get into the discussion, I would like to make a little announcement. We've been working on building a suite of testing tools to make acceptance testing JavaScript apps like React or Vue or Ember or anything else kind of JavaScript, fast and easy to maintain over the past few months. We call it BigTest. If you follow me on Twitter, I'm kind of loud about it. I love this project that we were working and one of my coworkers just published a blog post, giving an introduction to acceptance testing on React applications with BigTest. If that sounds interesting to you, you should check it out. We'll leave a link in the show notes. Now, let's jump right into it. Hi, Michael. How are you doing? MICHAEL: Hi Robert, I'm doing well. Thank you for inviting me to be on the podcast. ROBERT: Oh, no. Thank you for joining. I feel like this going to be really fun conversation. We went back and forth on Twitter a little bit and I was like, "You know what? This serves really well like a free flowing conversation." MICHAEL: Yeah, it's something I really like to talk about, specifically, when we're talking about components or when we're talking about React components. I think there's a lot stuff there to discuss and I think that React, specifically has really, at least defined that word for me. When you were talking about your mini application, I was like, "Oh, yeah. That's cool," and to me, that's kind of what these components have the potential to be, what these React components have the potential to be. It's kind of like almost these miniature applications that you stitched together to make a bigger one. ROBERT: Yeah, that's really cool. I was frustrated at the end of that day, just because that had so much logic crammed into it and you can kind of see that come through in the tweet but I'm not going to lie. After I sent that tweet, I was a little disappointed with myself because it came off a little bit like flangy but I guess we could just kind of jump right into defining what is a component. MICHAEL: When I saw your tweet, I was like, "Oh, you know like --" and of course, I don't know the component that you're looking at. It could have been terrible. Totally, it could have been terrible. I'm totally willing to believe that it was not a good component. But writing React is hard, especially writing good React is actually hard. At first, I thought it was easy but I think it's easy to solve your immediate problems but to write React to that is generic enough to solve lots of different problems, I think it's actually very, very hard and it's something that I've spent the last couple years learning. Anyway, that's kind of a tangent. But regardless of the component that you were looking at, the way that I've tend to think about these components is we used to have a model for thinking about how to build frontend applications -- ROBERT: Like MVC? MICHAEL: MVC, that's the one. That's the one that talking about. You have, here's your model, here's your view, here's your controller. You know, there are separate logical entities and lots of times, those even live in separate files on the file system and we keep them sort of separate and spaced out. As far as I can tell, that's a sort of paradigm. I learned it in school. By the time universities catch up with industry is at least, like twenty years, so it's probably something that was invented back in the 60s or 70s. ROBERT: I think it was like the 80s because Charles talks about it a lot and sort of Taras, actually because we're building something that's like a composable model, just like the Vue of React is a composable view, its components. I think it's interesting because I was listening to the Changelog Podcast and it sounds like you worked with Ember for a while. MICHAEL: I did, yeah. ROBERT: I forget, which podcast that was but we can find it and we'll link it to the show notes but I thought that was really interesting that you also came... Oh, maybe not came from Ember. You had experience with for, at least a couple years and that's where I came from. That's kind of where that tweet came from and was like, "Man, I don't like what happened to the word component," because when I think of component, it's like something that is encapsulated in a small piece of UI. But I'm okay with letting go of that. MICHAEL: Well, yes. Ember came out of something called SproutCore, which actually originated at Apple. Tom Dale used to be a developer at Apple. I'm sure you all know all of this but just for some sort of back story for others who might not. Apple was a place where MVC was really, really big. The whole Cocoa frameworks. They're all very much like, here's your controller, here's your view, core data has all of your models, that kind of thing. It's a software development philosophy that goes back a long time and has deep roots and I'm not here to suggest that because it's old it's bad, because lots of old things are actually very, very nice and good, especially in programming. We're starting to see a resurgence of functional programming ideas, for example, which have been around forever, since at least, the 60s or even earlier than that. It's not necessarily that I think that because it's old, that it's bad. I don't. ROBERT: Right, right. MICHAEL: But the thing that I do see in these React components is they kind of go very much against the grain. If you had, for example your model, your view and your controller as these vertical silos, just imagine turning that whole thing on its side and then cutting a slices of that, so that each of your React components has elements of MVC in it. They're all sort of mixed together. I run a training company called React Training and whenever I'm doing one of my training workshops, the way that I talk about it is a component is able to encapsulate three things: markup, which is the view essentially; state, which is essentially your data or your model; and behavior, which is essentially the controller, so what happens when the user is interacting with the view and clicking on the buttons? What do we do in response to the user input? You've got all three of those MVC elements in the React component. In fact, I've been meaning to kind of coin the term for a while. Instead of MVC, I call it MSB -- markup, state and behavior. ROBERT: You heard it here first. MICHAEL: That's right, here on The Frontside Podcast, we're coining new terms. ROBERT: That's pretty great. I guess coining off of that, is it fair to say that MVC kind of still lives on, except it's now in React? Or it's kind of more sliced up into smaller, more digestible pieces? We can always come back to this composability element, right? Would you say like really React would made it possible to compose many little MVC apps? MICHAEL: Yeah, exactly. The thing that people really, really love about MVC, I think you still have it in React. MVC, the thing that people always come back to is the separation of concerns. Let's just say, "I don't want everything sort of mingled together. I want it to be very clear. What is my model? What is my controller? And what is my view?" The cool thing about a React component is if you look at it, you still have very clear separation within the single component. You have a very clear separation of all three of those concerns: your state lives in an object called 'this.state,' then your view is whatever you return from your render method. That's in a completely separate spot, since still in the same component and then your behavior or your controller usually has its own method, so you can inline those in your render method or you can pull them out if this is how you'd like to do it. You can pull them out into instance methods. You can still have kind of that separation of the concerns within a single component. I think to your point, the React component model is all about composition, so this is kind of a term that we've actually adopted in other areas in technology. It's sort of just coming to frontend. The idea is you've probably heard of a service-oriented architecture for design in backend systems. These servers over here are application servers, these are database servers, here's our caching tier, here's our Ingress or LoadBalancer and maybe, you stitch them all together on the backend into one coherent system. You know, here's our storage and our image-resizing services. You stitch them all together on the backend into one coherent system but it benefits you to not build them all as one part of sort of monolith. We've got a lot of benefits from the decoupling. For one, if one piece of the system fails, the whole thing doesn't go down, so you can like swap it out or upgrade it and replace it with something else. I feel like that is kind of a similar idea to what is going on the frontend with these React components. ROBERT: Oh, microservice components. MICHAEL: Yeah, exactly. Each component is kind of like you said. It could be like a miniature application and it could be totally self-sufficient and I could drop it onto a page and it could just do its own thing or what I could do is I could take that app, that component and I could drop it into a larger app that can speak to it and can communicate state to it via the props that it sees and then can get state back out of it via these callbacks. I kind of view it as like all of these miniature systems that they can either be completely encapsulated and self-governing on their own or you can take them and compose them with a larger app. ROBERT: That's really interesting. I guess what is a component specifically in the context of a React. I guess, we kind of just answered that, that you can bundle all these things together, right? Does that make sense? MICHAEL: Yeah. The beautiful thing about this composition model is you can have all three of those things in the same component: markup, state and behavior. You can have all three of them right there, encapsulated in one component or once you discover more advanced patterns with React, you can actually make it so that a component only has two of the three or one of the three. ROBERT: And then it kind of like passes callbacks or props or state around? MICHAEL: Exactly. It can essentially delegate the responsibilities for handling the other pieces that it misses to other components around it. There's a pattern that I kind of coined last year called render props. ROBERT: Oh, yes. I remember hearing this on Changelog Podcast. I was actually one of the people that at first thought it literally was a prop name render. MICHAEL: Well, I mean it's not a bad way to think about it. It could be a prop name render. ROBERT: But then I found out it actually is a prop that you send JSX too and render whatever is there. MICHAEL: Yeah, exactly, a prop that you used to render stuff. It's the way that I describe it. When you think about it, any component, for example that accepts a render prop is really just delegating it's rendering to some other function. It can contain the two pieces: the state and the behavior, but then it can sort of delegate this third piece, which is the markup and say, "You know what? I don't really care about, specifically what I have to render." I don't have an opinion about that. You just give me a function and I'll give you my state and possibly, some behavior callbacks and then you can tell me what to render. I'm like a component that I have two of those three pieces. I don't have the markup, you just give me a function, that I will call when I need the markup. ROBERT: That's really powerful. MICHAEL: Yeah, exactly. I can have all three in one place or I can also with this component model, just delegate one piece or even two pieces, using these kinds of patterns to other components, so it's really nice. ROBERT: I'm always have to come back to this because this is where I kind of cut my teeth in the frontend world. I feel like render props are very similar to the yield pattern in Ember, where you can yield out a component and place it anywhere inside that template block. I think it's really similar. Because we have a large base of Ember developers that listen and they needed a draw like a parallel, I would say that's almost a parallel. I might be off on that. Taras, would you agree with that? TARAS: Yeah, it's very similar. There is one little 'gotcha' with render props in React, which I think Ember deals with a little bit more gracefully. I do use React all the time now. I use it much more often than I use Ember but -- ROBERT: Same. TARAS: Yeah and I'm kind of curious, Michael if you would think about this. Because there are certain things that, for example, JSX does, like one of the attributes of using render prop is that you want to pass stable functions, like something that is actually defined in init hook, so you're not necessarily recreating a new identity for this function every time that you pass into the render prop. Is that right? I think for someone who is might not be familiar with this, it's a little bit counterintuitive because it just kind of like, you just pass something and then you later realize, "Actually, I can't really do that because now your components were rendering over and over again." I'm curious like where can we kind of innovate in that? Because in Ember world, for example, it's really safe to use render props. If you're delegating to the context to do the rendering, you can very easily pass a block of template into the component and then the component will know how to render that in a performant way. My experience with render props in React was that the pattern in Ember is it's a very common behavior to delegate to the context of how the children of a component are rendered. This is the primary purpose of the yield in Ember and this is used by a lot of the components to provide APIs, so essentially, you're yielding, you're sending into the children function behavior that you want the developer to use while consuming your component. The parallel with React is that you would have, essentially a function, like you have a children render prop, which is a function that receives so that when a component is rendering the children render prop, it's passing some data into that function and it's invoking the children function and it's passing to it some data and then that data is being used inside of the children render function. Now, this mechanism works really well in Ember because Ember is using its own templating engine, so it manages every placeholder in the entire template as being passed into the component. It knows exactly what has changed in the function. Looking at that, the value just passing through component as a whole thing. It's actually managing each individual spot where the dynamic elements needs to be rendered. What that does is it allows it to manage the entire children function so you don't need to worry about stabilizing the render props. You don't need to assign them. Because there's also other challenges that kind of arise when you have to move the actual function that you pass into children. You have to move into the body of the actual component. Your ability to compose the state that is within the render function is kind of limit because you now have kind of broken up into different places. I'm a little bit curious what are your thoughts about this? And if there's any innovation that's going to require or improvements that will require in the way that React handles render props. ROBERT: I definitely remember seeing some tweets from you, Michael about this, like very recently. MICHAEL: Yeah, just yesterday in fact, I was talking about this on my Twitter. First of all, thanks for the question, Taras. I appreciate it. I think you kind of nailed it with the difference between Ember and for example, just JSX -- Handlebars, really and JSX is that Handlebars is not JavaScript. Handlebars is a language of its own, really. As the implementers of that language, the Ember team or the Handlebars team has complete control over how things work. For example, when functions are allocated. If they have a yield block, for example, that yield block does not have access to things like JavaScript Scope. It really is just a block within the templating language and so, they can decide when they're implementing that language. They can say, "We're only going to ever allocate one function for this yield block." JSX on the other hand, it really is just sort of some syntax sugar over JavaScript, which is nice lots of times because you can use things like JavaScript functions scope. You can do things like refactor it, like you would any other piece of JavaScript and pull that function out into its own variable or something like that. In a lot of ways, it's more flexible but with that flexibility comes this extra concern of what happens with the prop passing and it's a real concern but I don't think it's as big of a problem as most people have heard or might think it is. The real problem, the root of the problem is that if you have a pure component in React, the pure component is optimization tool in React, if you find that your component really is a pure component of just a pure function of its props and state, and that it will never render anything different, if it receives the exact same props and state, you can declare that that component is a pure component. Instead of just a regular component, it's now a pure component and so, it will actually opt out of the render cycle if it receives the exact same props and state on subsequent render. By exact same, what I mean is like identity triple -- ROBERT: Yeah. MICHAEL: -- Same. That's an optimization tool that you can use in React to say for example, maybe I've got a component and for some reason, it's always receiving the exact same props and it's rendering a lot. I can say, "You know what, React? Don't even waste your time re-rendering this component and doing the reconciliation around it and everything like that. If it receives the exact same props, don't even waste your time. This is a pure component. It received the same props. It's going to render the exact same stuff as it rendered last time, so it will completely opt out of the render cycle," so React won't even call the render method, won't even bother doing the reconciliation for that component or its descendants. It's actually a really, really nice way to get a little performance boost in that situation. ROBERT: Interesting. Does that mean, rather than passing some JSX that returns out an anonymous function, you would rather have like a pure component over that? MICHAEL: All it really means is that when you identify a place in your app where this is happening, instead of extending React component, you can extend React.PureComponent and now you component opts out of the render cycle. ROBERT: Gotcha. Because I see a lot in React applications, it will just return some JSX out of anonymous function, kind of think, Taras was getting at, when each re-render happens, it's recreating a new function and all of it were done inside of it, from the JSX because it's just a new function that's being bound each time. I think my takeaway from that and correct me if I'm wrong, is don't pass JSX and an anonymous function or I guess, from your tweets yesterday, that's kind of a premature optimization. Maybe, not pass as anonymous function but pass as pure component. MICHAEL: I hadn't yet gotten to directly addressing Taras's concern but the idea is -- ROBERT: -- Jumping the gun. MICHAEL: Yeah, it's fine. If you do have a pure component, that is when you're going to have a problem with this render prop pattern because you can't pass a render prop to a pure component. They just don't go together. Well, sorry. I should actually qualify that. You can pass around a prop to pure component but you need to make sure that it is always the exact same function, otherwise why are you making this thing a pure component, so there's a little bit of a problem there. I actually wrote the documentation on React's website on render props and there's a little caveat section where I discuss how you could get around this, you could convert it into an instance method or something else but then the concern at this point and this is why I said it's not such a huge problem because we're getting very, very specific now. Let's assume that we've got a pure component that is the child that we want to render and it accepts a render prop and that render prop depends on state and/or some sort of scope that it needs in the render method. Now, we've got a problem because we need to generate a new function in the render method and the fact that we're generating a new function and passing it to a pure component means that we are essentially negating all the benefits of extending pure component in the first place. First of all, in order to experience the problem, you have to get very, very specific and it's not easy to actually get into a point where the problem manifests itself. But then for the second part, fixing the problem is actually not tricky, so the way that you would fix this issue, there's a couple of ways to fix it. The most common way, I think to fix it would be to just say that pure component, let's just move that down one level and we'll put it inside the render method of the component that takes the render prop. The component that takes the render prop is no longer pure but the pure component has dropped down one level and we can still get all of the benefits of a pure component and again, its whole descendant tree lives underneath it. ROBERT: That make sense. MICHAEL: So, we can still get all the benefits of having a pure component, while still being able to use the pattern. But again, just getting back to what we were saying at the beginning. The render props is just one example of an advanced pattern that actually lets you delegate one of these three pieces to somewhere else. It's just one pattern. It's not like there are others as well. ROBERT: Yeah, so getting back to what is a component, is there ever a line that's drawn, like when does it stop becoming a component and it becomes something larger. MICHAEL: It's actually interesting because for a long time, we didn't have a component model on the web and I think -- ROBERT: It's very true. MICHAEL: -- still, like we mix to all three things together in our jQuery code. It was just like there was some state mixed in with some markup, mixed in with some behavior. It was all kind of mixed into one place. ROBERT: Nice plate of spaghetti. MICHAEL: Yeah, exactly. As soon React came along and actually gave us a real component model that really worked where we could actually identify these pieces, then all of a sudden, everything is a component and you really can make if you want, like if you really wanted to, you could make your entire application out of components. It could just even behavior stuff like, "I want to fetch some data," that could be a component or, "I want to listen to the window scroll or the window size," that could be another component. "I want to render an image or a bit of text or do some measuring or I want to do some parsing of some data or something like that," all of this stuff could be represented as components if you wanted it to. Of course, you can still extract those functions out into their own bag of utility methods and lots of times when I write a React Apple, I have a little bag of utils and I'll go and reach in there and grab those as I need them. But for the most part, most of my React apps are just components all the way down, so there's not much that I can't do with a component. The cool thing about that is what do you get when you have components, where you get reusability and sharability. I can make a component and I can just share it with you, Robert. I could say, "You want a component for listening to the windows size? Here you go. Here's the components. Got to render --" ROBERT: Drop it in. MICHAEL: "-- It will give you the size when you need it," so that ability to share code is, I think super important. ROBERT: Yeah, I think so too and it really helps you build applications rapidly because you can just start dropping these little components that are contained in composable throughout your entire app. I guess, I'm still clinging onto like there is maybe a line that is drawn and I think from the React community, there were a couple of terms coined called the container component and the presentational component, in which I immensely mapped those to basically being synonyms for controller and view. It's like the container components is kind of like a controller, like it delegates the view... Or decorates the view, not delegates. And the presentational component is just like we're talking earlier -- pure component. It's just taking props and rendering that. Is that fair to say? MICHAEL: Yeah. As far as I can tell, that's a pattern that was first talked about by the redux community, specifically I think Dan is the first to discuss that that pattern and it's a pattern that I think can work well. I haven't ever found it to be especially useful in my code but I can see how other people could like it for their code. I really just think it has to do with how your brain works. If you prefer structuring things like that, if you prefer like the vast majority of your components to just be these little view layers and then your main container components to hold all of the logic, I want fault you for that. I'd say, that's fine you can build your app like that. But I do think that when you're thinking about components like that, you are thinking about the much less like these miniature applications. Basically, in my opinion it's kind of a false separation. It's a separation that doesn't really need to exist because essentially, the thing that I really love about these components is you have encapsulation. You encapsulate everything. As soon as you adopt this pattern of containers and essentially, just these presentational leaf nodes, they're not as useful on their own. They just encapsulate some of the rendering logic. ROBERT: That's very true and they're not reusable. I mean, it's very, very hard to make those reusable. MICHAEL: Well, yeah. Most of the time, they're designed to be used with a very specific container. It is like, "Why couldn't we just put that in a container." Like I said, I really don't fault anybody for using them. It's just not how my brain works. I tend to think more about components as if they were these miniature applications and they're going to be useful on their own for the most part. One place where I have started to do that, the fourth thing that your components can encapsulate is style information, which is really just kind of the markup but it's the fourth thing and I think that I've really started to employ that kind of pattern when styling comes in. But it's not for this separation of containers and leaf nodes. It's just because I would like to encapsulate some of the styles down at a lower level or be able to reuse some of the styles down at a lower level, so that's when I'll typically start breaking up one of my components into multiple kind of tightly-coupled components but it's just for the sake of the styling, not really in any of the control flow or the logic. ROBERT: Right. When I first got into doing React, I was first like a little befuddled and then, I fell in love. I was like head over heels. When I hear about separation of concerns, it's always talked about like we need to separate HTML, JavaScript and CSS. They're all different things. They just need to be separate. I understand that. I kind of come from there but for me, my personal opinion is coming from the context of single-page apps, there is no feature that you can ship without the three. I don't think there is a complete feature that exists. Sure, there's edge cases that's like a blanket statement but I think those lines of separation is way more blurred these days and I think that's what React just unlocked. That's kind of where all of this is sort of rolling downhill and it's not a train. It's really powerful to be able to encapsulate all of those things together and then just think of your UI as these components. That's why we call them components. They componentized. Like when I have a butt-in and I drop it on the page, I don't want to have to go and make sure that I have the right class that's wired up in some other file. I can just drop the button in there and it's going to do its thing. I can pass the props, it'll change it, that's fine. It lives within itself. MICHAEL: Yeah, I would say you're absolutely right. You can't ship anything meaningful without having, at least some styling in there, unless you're shipping very, very basic behavioral style components. It's kind of one piece, I think like the React components are able to encapsulate their own styles but there's no, I guess officially recommended way to do it, which is where I think React get some of the critique, like some people come in and say like, "There are a million different ways to do styling in React and therefore, React is supposed to something like --" I guess, yeah, some of the other frontend frameworks have like, "This is how you do styling in our framework." ROBERT: Right, like the lack of convention. MICHAEL: Yeah, exactly. It's a blessing and a curse, though. If there's a lack of convention, it's harder for newcomers to know exactly what to do. ROBERT: Yeah, or like what's best for their use case. MICHAEL: Yeah, exactly but then on the other side, it's kind of a blessing because people are free to experiment and they don't have to feel like if they're experimenting, they're going sort of against the grain of what the community has already accepted to be the answer. I think that freedom to get out there and experiment is really valuable as well. ROBERT: You can see but I'm nodding. TARAS: I'm just curious what your thoughts were. This Suspense API is something that's... React kind of lead the way with components and now, the changes that are coming in with Suspense API coming in and it'd be great, if you can, are you able to explain a little bit about what it does for people that are not familiar and I'm curious what your thoughts about it. MICHAEL: Yeah, for sure. The Suspense API, I think is actually, with regards to what we've been talking about, with the encapsulation of markup, state and behavior and possibly styles, I think the Suspense API is kind of the React teams attempt to sort of encapsulate or generalize, at least one more thing, which is asynchronous behavior. The truth is, the most common async behavior that we know of, that most people are familiar with is a fetch, a data fetch -- you go and fetch some data. But there are others, there are things like loading of images and animations and navigation and things like that, where you have some time that passes in between when you initiate an operation and when you're actually able to render as a result of completing that operation. How do we manage or how do we generalize that and how do we think about it? The Suspense API is basically a way to declaratively say, "I need this async operation to be done." Let's just use the example of a fetch. I need this fetch. I need to have fetched this data in order to render this view and don't even attempt to render this view, unless the data has been fetched. Before the async API or Suspense, as they're calling it, you would basically have to manage this asynchronous behavior yourself. You would basically have to say, "Go and do the fetch," and while we're doing the fetch, maybe I'll set a loading flag in my state and say, "Loading is true," and then when the fetch gets back, I'll say, "Loading is false," and then I'll render. Maybe, while loading is true, I'll show like a spinner or some loading dots or something. What the Suspense API allows us to do or what they're hoping to do, again it's all very like... I don't know if I made this clear. It's still very, very, very, very early days for this API and I don't actually know when it'll be ready. But anyway, the idea is to be able to say -- ROBERT: Would you say the Suspense is killing the community? MICHAEL: The suspense around suspense. ROBERT: A terrible pun. MICHAEL: Anyway, the API is basically just a more declarative way to indicate where this asynchronous stuff is happening and give React sort of clues, if you will, to say, "There's some asynchronous stuff happening here, just so you know." That has many applications in the real world. Let's say for example, you were navigating in a master detail view and you're tapping down the master view and loading these detail views, if you tap a master view and you haven't yet loaded the information for the detail view, instead of sliding to the detail and showing the data still loading there in the detail view, you might want to show some sort of loading indicator while you're still in the master view. Then, if it's taking a while to load, they can actually select something else from the master view and in that case, you would cancel the old fetch and start another fetch. It's just supposed to make things like that, kind of feel a little bit more fluid and a little bit more intuitive to the programmer, so you don't have to think so hard about managing a lot of that complexity in your own head. ROBERT: Yeah. By the way, I love the mobile first language that you used. You tapped here, you tapped here, that slides in. MICHAEL: Yeah, for sure. It's all we're building these days. ROBERT: Yeah, it's very true. TARAS: It's interesting because the Suspense API, you wouldn't really imagine it to be within the scope of a view in a traditional sense, to [inaudible] but considering the scope of a component in React, it makes sense but I think people might not imagine as being something that would become part of core, potentially in React. I'm curious like what do you think other areas of React and I'm glad that the scope of components in React is so broad because it kind of opens up this question to be pretty much anything in React ecosystem. But is there an area of React building or the aspects of applications that you would like to see an improvement in or some kind of a change or something that hasn't seen the right amount of innovation in the same way that we've seen in other areas? MICHAEL: Basically, is there a place where I would like to see the React ecosystem improve? TARAS: Yes. MICHAEL: I know this goes kind of contrary to what I just said but I would like to see a little bit more cohesiveness. I feel like in some ways, the freedom is good but I also feel like in some ways, for the last couple of years, we've been just sort of like rehashing the exact same old problems again and again because React really made everything else so easy, like a lot of the stuff that was hard about building web apps, just got really easy when React came along. I'm not saying that because I have React training company. Of course, my livelihood right now depends on React but honestly, if it wasn't for React, I think I probably would have quit and done something else because it was actually getting really, really difficult for me. I was trying to build an app in Ember before I started with React and I just couldn't do it, you know? I just couldn't get the level of polish that I wanted in my app and get all the bugs out and get it working exactly how I want it to. It frustrated me, actually that I've spent a lot of time. I spent about 18 months, about $100,000 of my own money, just down the drain trying to build this app, trying to get it out the door and I wasn't able to finish it off. At the end of the day, I really started to question like, "Was it me? Do I just suck? Am I not a great developer? Is that the problem?" You really have to start asking ourselves hard questions like that when you put everything you have into something and it doesn't work out and then React came along and I was like, "I was just using the wrong tools." The tools were the problem. It wasn't me. There is a different way to think about this about building stuff. I thought the way that I was doing it was the only way that existed to build things but it turns out, it's not. I used to not understand what were people talking about when they were talking about functional programming or what do they talk about when they're talking about composition, solving problems with composition, instead of inheritance. I didn't even understand what that meant. But all I knew is really smart people would say stuff like that and I was like, "What are you talking about?" Now I feel like, because of React, I've gotten it. Again, to get back to your question, Taras, React made a lot of the stuff that we used to worry about, that we used to think about. It made it easy and so, we could build amazing things now a lot more easily. But now, for the last couple of years, I feel like we've just been sort of rehashing a lot of the same stuff. I would really like to see us, as a community sort of tackle the next level problems. I think the React Suspense stuff is definitely getting there. That's a problem that I really don't see anybody else sort of address, which is how do I make it easy to deal with the fact that applications by their nature -- these networked applications -- are asynchronous. How do I deal with that in a declarative way? That's why I'm encouraged by that work because I do think that it's kind of one of the more forward thinking things right now that's going on in the React community but I would like to see us in general, sort of like get past talking about styling and get past talking about service and rendering and move on. ROBERT: Right and I'm going to assume you have this really unique experience since you do a lot of trainings. I follow you on Twitter and it's just always talking about where you're flying to and who you're training, so the things have to come up there where you see these things in pattern over pattern over pattern. MICHAEL: Yeah, exactly. I see like a lot of and this again, gets back to Taras's question. I train a lot of people who are very new to React and I see people who are new to React, they really don't have a ton to go on besides just like blog posts and Medium pieces and podcast like this one and who am I? A lot of people in their React community don't even know or care who I am. It's like, "There's a guy out here who are saying stuff about React. Maybe I should listen to him. Maybe I should listen to somebody else," and it's confusing. It's confusing, I feel like, for people who are just getting into React. It's confusing. Like I said, experimentation is good but I guess, I wish the experience of coming to React was a little bit more like the experience of coming to Vue because -- ROBERT: Oh, like it was a beaten path. MICHAEL: Exactly. I don't actually think there's not a whole lot about the Vue technology that is compelling to me and let's not dig on it. It's just -- ROBERT: A personal preference? MICHAEL: Yeah, exactly, just preference but I do think the thing that is very compelling about the Vue experience is just the cohesiveness of it all. You go to Vue and there's like a way to do server-side rendering with data fetching and styling and -- ROBERT: They have a CLI and -- MICHAEL: And a CLI and a component and all these stuff. Yeah, and a router built right in. Anyway, I think that's a way that the React community could improve. I don't know if that'll ever happen because the React community at heart is artists and hackers and those people are traditionally very reluctant to be corralled and like I said, it's a blessing but I think from the perspective of people who are new to the community, it does tend to cause some confusion. TARAS: I want to add to what Michael is saying. What's interesting and I'm sure Michael sees this in his training but the kind of people that use React is very diverse. There's this kind of original group or there's kind of mentality that prompted the early adopters of React and now, we're seeing these companies that are traditionally enterprise-y with MSE backgrounds and coming into React. It's really interesting to see all this kind of worlds collide and then see what's happening as a result. It's definitely interesting on what's going on now. ROBERT: This is an excellent stopping point. I really agree. I come from Ember background so I would like to see a little bit more convention but I think it's okay. It would be nice to see that. Thank you, Michael for coming on. Is there anything that you would like to give a quick plug for and where people can reach you? MICHAEL: If you want to support the work we're doing, you can sign up for one of our upcoming workshops. We've got one right now on ReactTraining.com. We've got a workshop coming up, actually in my hometown of Carlsbad. You can come out here in July and hang out with us and do some React training. We got a really awesome host here who's right here in town. We're doing some React training workshops on July 25th through 27th, I think and then, other ways that you can support what we're doing is publish in all my open source code at GitHub.com/ReactTraining or you can follow us on Twitter at Twitter.com/ReactTraining or at my personal account at @MJackson -- Michael Jackson. ROBERT: Awesome. I really appreciate you taking the time to come on. MICHAEL: Yeah, thank you so much. It's been a pleasure. ROBERT: This is a great talk. Cool. Thank you everybody for listening. We are The Frontside and we build UI that you can stick your feature on. If you would like to give us feedback, you can always reach out to us on Twitter at @TheFrontside or you could email us at Contact@Frontside.io. We're always looking for any new topics or things you would like to talk about or things that are interesting to you. As always, thank you Mandy for producing our podcast. It's @therubyrep on Twitter and on June 28th, we're going to have Chris Martin on to discuss blockchain development.

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Turning A Losing Option Sale Into A Winner

Play Episode Listen Later Apr 30, 2018 40:12

Michael: Hello everybody. This is Michael Gross of OptionSellers.com. I’m here with head trader James Cordier. We are here for your monthly May video podcast from OptionSellers.com. James, welcome to the monthly show. James: Thank you, Michael. Can you believe we’re going into May already? Michael: It sure went fast. This last month here we saw some key developments in the markets. We have a lot of tensions between China and the U.S. over trade, and then we’re, lately, looking at 10-year treasuries going over 3%. A lot of people are wondering how this may affect commodities. What’s your take on that? James: Well, the trade wars that are supposedly about to take place, I think, are simply negotiation. President Trump mentioned many times going into the election that he was going to do “the art of the deal” and get us some more fair playing field, especially with China. Certainly the deficit that many goes out to China and doesn’t come back is something that he’s going to work on and, I believe, it’s more negotiating than it’s actually going to be major changes, as far as trade tariffs and such. Will some be put in place and some enacted? Probably so, but I know Mr. Mnuchin is going to China I believe in the next week or two, and he’s going to have probably the checkbook ready so he can basically get an olive branch going out. Needless to say, everybody wants a strong economic global growth and a trade war is not going to help that; however, getting a more fair and balanced trade, especially with China, I think is a really good idea and I think that’s what we’re going to get over the next month or two. All the discussion about it, I think, is going to be more of just that: just discussion. Michael: So, you don’t see any major changes in any commodities in the immediate term? Any immediate strategies people should be doing right now or as a result of that or, primarily, do you just see things leveling out here? James: Michael, the discussion of a trade war, like in soybeans or something that’s going to affect the demand for oil, I think a person or an investor should use that to look at the idea that it’s going to be settled. It’s not going to be a large disruption to production or demand in any of these commodities. When the price of a commodity is affected by discussion of it, I think you should take advantage of that. 3-6 months later, the fundamentals that we see now are going to be in place then, and basically it was hype that was going on and I think it’s going to offer opportunities. For markets that you’re following, if there’s trade discussion that’s going to move up or down the market that you were hoping to sell either puts or calls on, I think that’s going to be great picking in order to do that. Michael: Okay. Well, for those of you watching, we have an exciting show for you ahead this month. We’re going to be addressing a very common question we get. A lot of times, people sell an option, they get into the trade, the option moves a little bit against them, and then the question is “Well, what do I do now? Do I adjust the trade? Do I get out of it? If so, where do I get out of it?” What we’re going to do this month is we’re actually going to take you into some of our real trades we are doing in portfolios. Some of these, you’ve probably seen us talk about before. Pull back the curtain a little bit and show you a risk-parameter we might use and then recommend something you can use at home, as well, if you’re trading on your own or just get a little bit better insight into how we might do it professionally. A good analogy, and, James, I know you can comment on this, is we all saw the incident with Southwest Airlines this month where they had the problem with the engine. Certainly a tragedy for the people involved that it effected; however, one thing that really stuck out to me is the pilots that landed that plane and saved all those people. Have you heard the transcripts? They’re just cool as a cucumber. They knew exactly what to do, they had processes in place for every situation or condition, and you pilots out there that are clients, you know exactly what I’m talking about. When people are trading, and you know this more than anyone, James, you should have a contingency. Anything that happens, you should have a plan for that happening and have that type of control. That’s how you avoid that “what should I do” when you get into certain situations. When you’re trading, you deal with the same thing, James, am I right? James: I certainly do, nothing like that pilot was facing this past week, but in a similar note, you do have a plan. We are generally positioned in anywhere from 8-10 commodities and when one is causing the plane or the bow to veer right or veer left you simply need to make the adjustment. It shouldn’t be a huge deal to your portfolio. You should really be able to make a minor adjustment. If you’re in 10 commodities and 1 is going really in a direction you weren’t thinking, you should have a plan for that. It shouldn’t be a panic. It shouldn’t be large turns like this. You should just be turning the wheel like this and we’ve got an adjustment that needs to be made, the cocoa market or the coffee market or the silver market, and you just steer the plane and get it flying level again. Your portfolio, whether you’re having a portfolio with us or you’re investing with one on your own, you should never have a position that makes that much variance to your account. If you have 1 position in your account, name the commodity- it doesn’t really matter, and if it moves 5-10% in a short period of time, if that makes your account move larger than it really should be, it shouldn’t have a large variance because the market moved 5% or 10%. If it is doing that, you’re simply not positioned correctly. Always have in your portfolio 8-10 commodities and if 1 is making the plane go like this then you just pull it back like that. You should never have a position on your account that you can’t, in order to make the plane fly smoothly again, if you would. It happens all the time. We’re not right all the time. We’ll have 8-10 commodities in a portfolio and by-goodness, 1 is going to be causing this to happen and you just straighten the plane. Just like that brave pilot did, he knew exactly what to do. My goodness, 1 engine went out and he was able to do that. We have 10 engines on our plane. We should never have one commodity or another commodity make the plane go like this. It really shouldn’t happen. For your investors at home, if that’s happening to your portfolio you don’t have a diversified portfolio, and that is something that we at OptionSellers.com always strive to have so that when something happens that was unexpected, there’s a big headline in a certain commodity, you just straighten the plane and that’s what we do. Michael: That’s what we’re going to talk about today. If you’re trading at home or you’re checking out this strategy, one of the biggest advantages you have as an option seller is that flexibility James was talking about where if you’re trading, and say you are worried about a Chinese trade war or this or that, you have the ability to build out a strategy that can benefit from nearly any type of economic condition. It’s one you should use if you’re an option seller. We’re going to address and use a specific example this month from a market we talked about. We’ll show you how to adjust a trade if you do get into those type of situations where it’s not working exactly the way you hoped it would, and we’re going to give you a couple examples here of how to do just that. James, why don’t we move into the trading room and we’ll talk about our markets this month. James: Sounds good. Michael: Welcome to the markets segment of the OptionSellers.com May Podcast. We are going to talk about a market this month that we featured in last month’s podcast and that we’ve got a lot of questions on over the past month so we’re going to talk a little bit about it. This does go into the topic of this month’s podcast, which is how to turn a losing trade into a winning trade. So, first let’s talk about the market… this is the cocoa market. You saw us feature this market in last month’s podcast. Cocoa we talked about selling the 32 December call options. The markets rallied a little bit since then, did not threaten a strike, but it’s up a little bit. James, do you want to tell us what’s going on with this trade and this market? James: Michael, what’s going on with cocoa right now is the last several years we’ve had a production surplus worldwide. In 2018 and 2019, some of the largest cocoa analysis around the country is predicting the first deficit in quite some time for world production. Basically, high prices cure high prices and low prices cure low prices. The initial trade is that we’re going to have a production deficit this coming year and then the market must go much higher because we’re running out of cocoa, but in all actuality what happens when the price of something is rising that is dampening down demand. So, for example, when cocoa was trading around $2,000 and $2,100 a ton, chocolate manufacturers were purchasing cocoa. As it rallies, they purchase less and less and less, and the demand has already taken place. So, when we do get an announcement of a production deficit, that usually gets the last of the buyers, the headline traders, to get involved with the market. We saw a spike here recently in the last day or two where cocoa was threatening $2,900 a ton. Keep in mind that’s up almost 50% in price over the last few months. Basically what that does is commercial demand then starts to fall and then basically it’s a speculatively driven market. Usually a market that has moved 50%, we have just a couple percent difference in production, 2-3 years ago up until now, and yet we’ve had a 50% increase in price; thus, we think that’s a temporary move in the market. While we were suggesting selling the $3,200 calls last month, the market did not get anywhere near that level but, as some of the viewers and readers have mentioned, the price of those options are up slightly from, maybe, when we discussed selling them. Michael: Sure. I think that goes back to a good point is, we always say this, we don’t know where the top or bottom of a market’s going to be. That’s why we are selling options in the first place. We’re not trying to pick that anymore. You don’t have to pick that either as an option seller. It’s an important point to make as an option seller… you’re not trying to call the market, you’re just picking a window where you think prices should remain and then selling options outside that range. James: Exactly right. Fundamentally, the price of cocoa over the next 3-6 months should be at this level. The price of coffee or crude oil based on fundamentals will be at a certain level, as well. Basically, you’re selling option premium that puts you out-of-the-money sometimes 40-50-60%, and some 8 times out of 10, that leeway is all you’ll ever need. As a matter of fact, anyone listening to us right now and, of course, our clients are long-term investors. So, if you are, like we discussed just recently, you are flying a plane and you want it to have several engines, okay? Your portfolio should have several commodities; however, when one does exceed a level that you thought it would, you can roll up your position. For example, each day that cocoa gets more and more expensive, the likelihood of it staying above its fundamental value diminishes. So, if you did short cocoa prices at, for example, $3,200 a ton by selling the $3,200 call, you may choose to roll it up to the $3,400 or the $3,500 if in fact it’s something that if you want to stay with the market or you want to stay with your position, but speculatively the market is driven higher than we thought it would do. That is certainly one approach that we often take and someone who maybe has that position on right now might want to take that, as well. Michael: So, what you’ve just explained is how to turn a losing trade into a winning trade, the title of our podcast here today. Let’s go back and just explore that briefly. When we talked about selling the call here, we talked about selling it and we were right about here, now the market has rallied a little bit. As you said earlier, it really hasn’t threatened the original strike. In fact, I don’t even think the original premium has doubled yet. James: No, they hadn’t. Michael: Yet, we got a handful of people writing, “Ah, I sold a cocoa call. What do I do now?” Well, there’s 2 points to that. One, we’re not really an advisory service, we are managed fund here, so we can’t really instruct you all the way through the trade. The bigger point here is when we went back to the beginning of the podcast that James just referred to, we talk about the pilot steering the plane. If you’re putting a trade like this on, you better have a plan for what you’re going to do for when you go into that trade if it doesn’t move the way you think. Now, the movement in cocoa right now, it hasn’t really been extreme, it is pressuring the strike price a little bit. James feels it’s still fundamentally justified trade, but if you’re getting uncomfortable or it keeps rallying or starts pressuring that, he’s talking about rolling the positions up. James, do you want to explain the mechanics of that if you were, or if somebody was holding a 32 call what they would do to recapture that premium? James: Okay, so let’s say you sold 10 contracts of the 3,200 December call strike and the price is now exceeding your risk tolerance. Let’s say you sold them for $500 or $600. Let’s say you have the 100% rule for your portfolio, so the option has now doubled to approximately $1,000-$1,200. Now what I would do, if you were considering staying with a fundamental trade, which I think cocoa will probably be in the high 20’s at the end of the year and nowhere near 3,200; however, you buy back your $3,200 call and you can sell 20 now of the $3,400-$3,500 call. Eventually, the fundamental factors are going to slow this market down and we think that come November, when the December contracts expire, we’ll probably be in the high 20’s… like 2,800-2,900 at the most. So, if we do exceed 3,000 for a brief period, I would use that certainly as an option selling opportunity in cocoa calls. 3,400-3,500, I think, the market will not exceed that level in our opinion. We’ll have to wait and find out, but come November I think the market will be much below that. Michael: So, you’re doubling up on those strikes. So, you sold 10 and then when you roll you’re selling 20. That allows you to, one, get back your original premium, but it also allows you to recover the loss. James: That’s exactly right. Keep in mind as we discuss this, we always want to be in 8-10 commodities. We are selling options sometimes 40%, 50%, 60% out-of-the-money. You can’t, or you probably don’t want to, base your entire investment and the viability of this type of investment for you based on the idea that you sold 10 contracts of cocoa. Okay? We are selling commodity options in approximately 8-10 different sectors and, over the long-term, selling options 40%, 50%, 60% out-of-the-money is going to work out quite well, but, by all means, we stub our toe. We get kicked in the shin once in a while, but if you’re a long-term investor, and everyone should be, whether you’re long stocks or the real estate market or you’re selling options as an investment portfolio, you just know that 1 or 2 may not go your way and you definitely need to manage your portfolio. This is one way to do it. Another idea is, you know, taking a losing trade. If the investment idea wasn’t correct, we’ll take a look at it again. Let’s see if the market continues to rally, we’ll sell options on another day, or we’ll come and visit cocoa again next year. Have that ability to do that. Michael: That’s an excellent point. If you’re watching some of the things we do and you’re trying to trade just at home online saying “Oh I like that trade. I’ll sell this and see how it goes”, that’s really not how these are meant to go. When we are putting trades on a portfolio, we are putting them on as part of an overall portfolio of, as you said, 6, 8, 10 different positions. Sometimes they’re hedged on the other side of the market, sometimes they’re balanced by a long or short position somewhere else. So, these are incorporated into a much bigger scheme. If you’re just taking them and you’re really selling them out of context, so if something like this does move against you it’s a big deal for your portfolio, where for us is just like the captain of the plane. It’s a flip of a switch, just something different you need to do to adjust the position. James: Exactly, Michael. You should always be able to have both hands on the wheel and just make small adjustments. If you sold cocoa calls recently, your positioning should only be going like this and you shouldn’t be turning the wheel like this. If you’re doing that with your portfolio, you’re not doing it right. Michael: And as we talked about earlier for managed clients, we are going to be taking a closer look at this market this month. It is starting to get interesting and maybe look to see what we can do there in the coming weeks here. Let’s talk about another market here for our second part of the podcast this month. That will be the crude oil market. If you want a market that has been in the news lately, one that has been in the headlines has been the crude oil market. We’ve been closing in on the $70 mark for the first time in 2014. It’s been one of the strongest commodities on the board since last fall. James, you want to tell us what’s going on here? What’s behind this rally? What’s been pushing prices higher? James: Michael, Saudi Arabia has done just an incredible job leading the OPEC nations, as well as Russian production. Someone sat down with members of OPEC and said, “Listen. We cut production by 2-3%, we’re looking at the possibility of a 20%, 30%, or 40% gain in crude oil prices.” Lo and behold, that math sounded good to the OPEC producers, they did start cutting production, not a great deal, just a couple percent. Basically, we were looking at a 300-400 million barrel of surplus floating around the world, both in tankers and at storage facilities in some of the OPEC nations. After some 18 months of oil production cuts by OPEC and along with Russia, that 300-400 million barrel surplus is down to some 30 or 40 million barrels… just a huge gain for OPEC. Their ability to cut production has just paid off in spades. We have approximately 35-40% increase in oil prices. OPEC is very cohesive right now, something that a lot of analysts are quite surprised at and we are surprised at it, as well. The ability to keep that production offline when prices are going up, my hats off to OPEC, they’ve done a very nice job in order to do this. The market is now balanced. Basically, for every barrel that is being produced there is a consumer right now. We have a very balanced market and, as you can see, it’s up some $20-$25 from where we were just not that long ago. Michael: Yeah, compliance has been surprising, too. I read somewhere that they’re at like 138% compliance. Before, they used to have trouble even getting half the members to hit their quotas, now they’re above 100%. James: Someone did the math for the OPEC producers and said a small 2-3% cut can possibly increase the prices 20-30%. They nailed it. Here are the final results. Michael: As you mentioned, that’s taking quite a bit of oil off the market. OPEC production down 11.4% since these started in January 2017. So, that’s a pretty good drawdown. That’s really, what James is saying, is behind this rally right now. That and we have a pretty good seasonal in effect that’s helping drive prices now, as well. James: Basically, as we get into driving season in the U.S., the largest consumer of oil and gasoline in the world, you have a ramp-up of production where you’re cracking oil into gasoline and, generally, that happens between the months of March, April, and May getting ready for summer driving season. So, that cracking of oil takes oil production and supply off the market, turns it into gasoline, so you have, once again, a temporary shortage of oil as not only OPEC taking barrels off the market but also you have the largest refining season coming up going into driving times of June, July, and August here in the United States. This takes barrels of oil off the market, they are cracked into gasoline, and that’s why you usually have this seasonal rally going into May and June. Michael: Which seems to be following it very closely this year, the seasonal tendency. Now, one thing we’re seeing this year, and you and I were talking about this earlier, is refineries are operating at a torrid pace right now. They’re really hitting it pretty hard as far as production goes. Right now, gasoline production running about 4.2% ahead of pace for where it normally is. So, you’re thinking that they may hit those levels earlier this year and we may see a topping action in crude a little bit earlier this year? James: You know, consumption for gasoline in the United States peaks in June and July right around the 4th of July, or so it seems, but the price of crude oil will often top before then. Crude oil is clearly where gasoline comes from, and as those barrels come offline, in other words, they’re cracked into gasoline, the price of oil will often top before gasoline does. So, the demand is still there but it has already been produced. So, while the greatest demand in the United States is around the middle of the summer holidays, the demand for oil to produce that gasoline has already taken place and thus the seasonal comes down sooner than you would think. Michael: Sure, and this chart’s showing you can see a top in crude any time between mid-May to early-July, as you said; however, if refineries are hitting those levels where they deem supply adequate, they’re going to cut back production sooner and that will hurt demand for crude. James: And then the crude barrels start to accumulate more. Michael: Okay. So, we have that and then also, on the other side of the coin, what we have coming up or what’s even surprised OPEC is the level at which the United States has been able to ramp up production. They’re taking advantage of these higher prices and you referred to high prices carrying high prices earlier. We’re seeing U.S. production just blowing up, going up about 10.5 million barrels a day. Is this having an affect right now on the supply? James: Well, basically it’s balancing… the additional barrels coming from the United States is balancing what OPEC’s not producing. The fact that production in the United States is going to probably exceed 11 million barrels a day coming up in 2019 and 2020. We do see this plateauing and the excitement in oil right now is probably going to be rolling over. If the United States wasn’t the largest consumer, let’s say all these barrels were being produced on the opposite side of the globe, getting them to the United States would be difficult and then maybe the largest producer, now the United States, wouldn’t be such a big deal, but the fact that we’re producing it exactly where we need it, here in the United States, that will offset some of the global demand and price shock around the world. Everyone always talked about, “The United States is susceptible to what OPEC does”… well, we’re producing all the oil we need now, so the fact that oil is approaching $70 and here in the United States we can produce it for between $35-$45, how long is it going to stay above $70? It can only exceed it by a certain amount of dollars per barrel and for a certain period of time. If this level gets to 11 million barrels a day or 11.5 million barrels a day, oil will be coming back down into the low-mid 60’s at the very least, and probably setting up a sale here that’s looking like in May or June for option sellers. Michael: Okay. So, your outlook for the intermediate turn, obviously we talked earlier and we’re not trying to predict what prices are going to do, only what they’re not going to do, but do you see a little more strength coming in and then weakening, or what’s just the general outlook for that window? James: What’s so interesting right now is in some global economies, especially throughout Europe, they are going to feel this large gain in the price of oil. Japan is going to start feeling this large gain in the price of oil. Basically, they are 100% consumers and produce nothing, so oil going from $45 up to $70 will start slowing demand from these major consuming nations. At the same time, when the United States is now producing the most they ever have and now the largest producer in the world, we see oil kind of plateauing here this summer right around maybe June or July, but not falling a whole lot. The fact that we had a 400 million barrel world surplus and it’s not approximately 40 million barrels, the market’s extremely well balanced right now. So, we see some of the excitement that’s going on now in crude oil plateauing somewhat, maybe coming down some $3-$5, but not falling through the floor by any means. Oil production right now is down with OPEC. They have been rewarded for keeping barrels off the market, and I don’t think they’re going to forget that any time soon. I don’t see them going back and ramping up production. They’ve been rewarded so well, they’ve learned a great lesson by keeping, at first, some 3% oil barrels off the market, now it’s up to some 9%, 10%, or 11% of barrels off the market. They’ve learned a great lesson and they’re being rewarded for it, so we don’t see production swamping this market. We see oil possibly trading at about a $10 trading range from where it is now throughout the end of the year. Michael: All that media coverage and, of course, the price rally has increased the volatility, which is what we like to see as option sellers. Taking a look at a trading strategy, how to trade that exact scenario you just described, you’re looking at one of your favorite strategies, a strangle. James: It certainly is. You discussed, just now, headlines and OPEC and trade wars with China and the value of a dollar. All of this really has the volatility of petroleum, especially crude oil, at record levels that I haven’t seen almost since I’ve been investing in commodities, but right now you have put premium extremely high, even with a bullish fundamentals, and you have call premium through the roof right now. My favorite position in crude oil for the rest of the year is practically a $45-$50 strangle around the price of oil. So, in other words, we would be selling calls at the $90 level and selling puts at the $45 level. We think that the idea that strong fundamentals right now will keep the market from falling, but yet the fact that prices are high right now and that’s going to start curtailing demand. My prediction for the rest of the year is about a $10-$12 trade range for crude oil and here we have one of the best opportunities I’ve seen to position in crude oil in a long time. That’s putting a $45-$50 strangle around oil. We’re not right all the time and every once in a while we don’t get it right, but for oil to stay between 45 and 90 through the end of the year, I think, is an incredibly high probability position and that’s something that we’re taking advantage of, as you know, Michael, right now. Michael: You couldn’t do that a year ago. You didn’t get that wide of window, and now we have it, it’s on the table, and you want to take it. James: Michael, that volatility is your friend. I know when it first happens and you already have positions on, “Oh, it’s too volatile for us”… that’s what you like. A year ago, 2 years ago, 3 years ago, the widest strangle you would write on crude oil was approximately $15-$20 and now you’re writing a $45 strangle. We, as well, are going out slightly further in writing and $50 strangle around crude oil. We’re pretty confident it’s going to stay inside that window. We’ll have to wait and see. Michael: And again, watching this at home, this is an example. We are not recommending this to you personally as the perfect trade. In our portfolios, we are diversified over December, January, February, and March. Different strategies and different risk management techniques, but in going out to a month like February, a lot of people think that’s a long time out. We’re about 9 months out, but your plan isn’t to necessarily hold these until February or March or whatever you’re writing out there. Often times, with the right decay, you can be getting out of these a few months early. James: Michael, as we discuss with our clients when they first become clients, we will sell options 6 months, 9 months, 12 months out into the future, but not with the idea that we’re going to stay into that position until the very last day and try and collect the very last dollar. It’s really not important to do that. If we select options fairly well, for example, on the position that we’re looking at right here, after maybe let’s say you sell options 9 months out, if you selected them fairly well, 5-6 months later you should have collected about 85-90% of the potential premium. That is a great place to ring the register and lower your risk and be happy with the position and get out of the trade and buy it back early. Often, we look at February or March or April when we’re talking about selling options. Basically, you’re Tom Brady and you’re throwing it to where the market is not going to be. That is what we’re doing. So, when Michael discusses layering different months and different commodities that’s what we’re doing. To own a portfolio like that, it looks like a great deal of layering in the market and that is what it is and it allows you to have 10 engines on your plane so that when one goes a little bit awry you have other positions to make sure that 80% of your portfolio is going the right direction. This is a great example of doing that. Michael: Great advice. If you would like to read more about the crude oil market, what we’re recommending there this month, or going into our managed portfolios, you will want to read this month’s newsletter… that’s the May edition of the OptionSellers Newsletter. That comes out May 1st. It should be in your e-mail box or showing up in your hard copy mailbox a couple days after that. Of course, if you want to learn more about the strategies we discussed here or the rolling or strangle or some of the other concepts James mentioned, if you don’t have it yet, The Complete Guide to Option Selling: Third Edition, you can get it on our website at a discount, on Amazon, or the bookstore. The link to that is www.OptionSellers.com/book. Let’s move into our closing section for this month. Michael: Thank you for watching this month’s edition of OptionSellers TV. James, thank you for those insights on the cocoa and the oil markets. You have any predictions for the upcoming month? James: The month of May 2018, Michael, I think is going to be the realization that the U.S. dollar is not the weakest currency in the world. The U.S. is looking at probably 2 or 3 rate hikes this year. The U.S. economy is still doing quite well and its counterparts, especially in Europe, the economies in Germany, Italy, France, and England have been doing pretty well over the last 12-18 months, but the expansion in countries like Germany especially, the major driver of the European economy, is showing signs that it may be peaking already. Consumer Confidence in Germany is down, a lot of the sales in Germany is down right now, and not that it’s going into recession, if it does that would be the shortest-lived recovery ever, now don’t see that happening, but the U.S. economy still is on this footing and the European economy is fluttering already. That is going to make the U.S. dollar more buoyant than a lot of investors thought it would be and that is going to stabilize a lot of the commodities. So, getting into short options right now, whether it be puts or calls on precious metals, energies especially, and some of the foods, I think it will be a great calming effect in the 3rd or 4th quarter of this year. So, any discussion about the U.S. dollar isn’t doing so good, any discussion about inflation, I would fade those ideas and sell options on those ideas and, I think, later on this year you’ll be well rewarded. Michael: Sounds like a good outlook. We’ll have to keep an eye out for that. Also, May is a very active month in the grain markets. We have corn and soybean plantings going on here in the United States, so that can often create opportunities there, as well, for option sellers, sometimes on both sides of the market. James: Practically every year we have large influx of volatility in corn, wheat, and soybeans and we are ready and waiting for that to happen. Michael: Excellent. For those of you interested in finding out more about managed option selling portfolios with OptionSellers.com, you can call to request a consultation. At this point, we are booked out through July for our upcoming consultations; however, I believe we still have some spots left for consultations in June for those July account openings. I believe I misspoke there. The consultations are open in June, the account openings are for July. So, if you are interested in those upcoming openings, feel free to give our office a call here and speak with Rosemary. The number is 800-346-1949. If you’re calling from overseas, the number is 813-472-5760. James, again thank you for your insights this month. James: My pleasure, Michael. It’s always great to give our wisdoms and our insight. We’re not right all the time, but I do like the landscape for selling options here in May and June. Michael: Perfect. We’ll look forward to the month of May and we’ll talk to all of you again in 30 days. Thank you.

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How To Turn Stock Market Mayhem To Your Advantage In March

Play Episode Listen Later Mar 20, 2018 33:34

Michael: Hello everybody. This is Michael Gross of OptionSellers.com here with head trader James Cordier. We’re here with your March OptionSellers.com video podcast. James, as we head in to March here, what’s on everyone’s mind is the obviously the big development we had here in February. Big stock sell-off, it’s on everyone’s mind right now… stock investors are busy brushing themselves off, wondering what’s next. Over here in commodities, we didn’t really see a lot of movement in the markets themselves, but we had some developments in the option and option volatility. Why don’t we start off this month by maybe just talking a little bit about what happened in stocks themselves. James: Michael, it’s interesting, a couple of years ago we had BREXIT. We had Switzerland leaving the European Union, we also had the election outcome a year and a half ago. All these events didn’t really change fundamentals on a long-term basis, but what they did do is they injected a lot of volatility. The 3,000 point drop in the Dow Jones here just a couple weeks ago did exactly that. It turns out that there’s something called the volatility index in stocks. There was an instrument that was built for people to go short or long on it. It seems as though everyone was way short volatility. In the stock market, that got unwound, it developed a 3,000 point drop in the Dow Jones, and now we’ve got to the stock market recouping quite well. It’s probably going to continue to rally everything as far as we can tell. The U.S. economy looks good, the global economy looks good, stock profits look excellent right now. Volatility spiked in a dramatic way. For ourselves selling options on commodities, we saw volatility index spike as well. Precious metals, energies, and some of the foods did have a spike. In many cases, a lot of the positions we had did increase in value during this large increase in volatility. It’s not always fun when this happens, but it is absolutely a key ingredient in option selling. It allows us to sell options, as you know, 40-50% out-of-the-money. Without that creation that happens every 6-12 months in the volatility index in commodities and in stocks, we wouldn’t be able to do what we do. It’s a key ingredient and it did happen this past month. We’re very excited about the opportunities that it has now in selling options. Michael: It was kind of ironic, James, because you and I were watching this unfold, we were watching the stock market take a nose-dive, and we’re watching our commodities boards and basically nothing is going on. We have gold and silver prices staying silver, the grains and foods were business as usual, crude took a little bit of a sell-off, tied into stocks, but that was really the only one. Over in natural we had to sell off, but that was really already under way. It didn’t have much to do with stocks. Yet, you saw option volatility spill over from that stocks and it increased the value of those options temporarily, but now you’re seeing that come off a little bit. Is that right? James: It is. The volatility index in the stock market is practically to the same level as it was prior to the 3,000 point sell-off. In commodities, it has now come back about 75% of the level that it was at. The fundamentals never really changed at all, especially in commodities, and I think it sets up a great landscape for doing what we do. We’ll find out relatively soon. Michael: You know, a lot of people, they want to get diversified from stocks. That’s one reason why they’re interested in selling commodities options in the first place. You know, it was interesting… on CNBC they had an article about on the biggest day down in the Dow it was down, what…1,075 points or something like that? They ran an article that there was only 7 stocks higher that day and 2 of them were cereal and tobacco. It was Kellogg and one of the tobacco companies- I forget which one. CNBC’s analysis of that was, “well, even when stocks are down, people will still eat and they’ll still smoke”. That’s a point we make constantly is that no matter what’s going on, people still need to eat, they still need to drink coffee, and they still need to put gas in their tanks. James: The breakaway from the correlation from the stock market was very evident on that day. Gasoline and crude oil and soybeans and coffee… business as usual. That’s why a lot of our clients like being diversified away from the stock market. On that occasion, we did see the volatility index increase options on commodities, as well, and that’s just a key ingredient for us doing the business that we do. They did increase while we were in them. We just see, going forward, just a great opportunity to use that additional premium to position clients. Michael: So, we got a little bit of a surge in volatility, that pushed premiums up, and now that’s coming off. The premium is coming back down a little bit, but now we’ll have that historical volatility in the market. One thing you and I have talked about is now that opens up opportunities for us to do some strategies that maybe we weren’t able to do before. James: Right. In 2017, we saw volatility come down steadily the entire year, which really produced a great return for a lot of option sellers last year. Chapter 10 in the Third Edition of our book, we talk extensively about credit spreads. We haven’t had the opportunity to do that the last year or two because volatility has been low. The influx of volatility that happened over the last 30 days now allows us to do this. It is probably the most safe, sound option strategy there is. With the additional premium now, we’re looking forward to positioning in that fashion the next 6 months or so. Michael: Okay. One observation we were making as well is when volatility is up in options, obviously that’s when we want to sell them, but when the volatility is higher there can actually be less risk in selling the options because you’ve already had that surge in volatility. So, often times the path of least resistance is to come back off that volatility after you sold them. James: We saw that the months after the BREXIT, we saw that months after the Trump win during the election of 2016, and, boy, we did quite well right after that period. We expect that to happen again this year. We’ll see if that’s how it plays out. Michael: All right. As we head into March, we’re going to show you a couple ways maybe you can do just that. We’re going to move on to our feature markets segment and we will cover that in just a couple minutes. Thank you. Michael: All right. So, we’re back with our markets segment this month. The first market we’re going to talk about this month is the natural gas market, a market that’s near and dear to our hearts. Natural gas, if you’re unfamiliar with commodities, it’s a great market for selling options. There’s a ton of liquidity there and also you can sell options very far out-of-the-money, so it’s one of the core markets you want to focus on if you’re building an option selling portfolio. One of the first fundamentals that we look at when we look at markets like natural gas is going to be the seasonal tendency. As we know, seasonal tendency charts are not guaranteed by any means, but they do give you an average of what prices have tended to do in past years at different times of year. What we find is there are underlying fundamentals that tend to drive these every year. We’re going to take a look at the ones in natural gas right now. James, do you want to talk about that and why we see this type of movement in gas prices often in the past? James: It’s interesting, Michael. Often, suppliers want to bulk up for seasonal demand in winter, and everyone is basically building supplies going into December, January, and February. If the winter, especially in the Northeast, falls just a little bit shy of expectations or it’s 5 degrees cooler or warmer than normal, the supply actually is more than ample and prices usually start coming down in January and February as we see that we’re going to have enough natural gas and we’re not going to be running out. Again, here in the United States, we’ve had an extremely mild winter. Philadelphia, New York, and Boston, it has been some 10-15 degrees warmer this year than normal, and prices have come down just like seasonally they do. Supplies of natural gas this year are surprisingly low. Right now, we are approximately 23% below the supply of last year. We’re 19% below the 5-year average. That is because we’ve been exporting natural gas, something brand new to the exporting ability right now here in the United States. It’s setting up really nicely for the seasonal rally that we’re expecting. Natural gas right now is near it’s 12-month low here as we end February, often where it is this time of the year. Seasonally, what then happens is suppliers start building supplies then for summer cooling needs, which is like May, June, and July, and that often will give us a price spike starting in March and April. Michael: So, what you’re saying is this is really a factor of distributors accumulating that inventory, driving demand at that wholesale level, which is really what’s pulling prices higher… at least it has in the past. James: Exactly right. If we get through the winter, and it looks like we are again this year, prices usually come down because we are more than well supplied this time of the year. What wholesalers do for summer demand for cooling needs, especially in the Northeast, is they start building supplies and that demand boosts the prices starting in March, April, and May, and it’s setting up quite well to do that again this year. Michael: You know, it’s interesting, James, we talked about stock prices coming down earlier and a lot of people noticed a correlation and said, “oh, natural gas prices came down with stock.” That price really had nothing to do with that move in stocks. Natural gas prices were already coming down as a result of just normal seasonal tendencies. Wouldn’t you agree with that? James: Right. The natural gas market is so liquid. It takes no cues from any other market. The price of Apple stock has absolutely nothing to do with the supply of natural gas, the demand, or the price. It was in a downtrend here in the last few weeks just as the seasonal entails, and it was again this year. Natural gas definitely uncorrelated from the stock market and this year proved it as well. Michael: Let’s take a look at some of the fundamentals of where we find ourselves right now at the end of February, as far as supply goes. First of all, we’re going to take a look at the current chart, which looks a lot like that seasonal one. It looks like we may be at a low right now, technically looks like we’re a little bit set up for a rally here. Is that what you would expect it to look like this time of year? James: Michael, we could almost overlay the seasonal that we were just looking at and it lines up extremely well with this year’s pattern. The market is oversold right now, as the stochastic on the bottom of the chart describes. We really like the idea of the fundamentals being slightly bullish right now. We have nearly 20% below the 5-year average on supplies here in the United States. We’re going to be exporting more natural gas this year than ever before. As we get into the spring and summer cooling season, we do expect a nice bump up in natural gas prices, setting up, what we think, is a very good put sale for new option traders. Michael: Okay, good. That supply situation James was referring to, this shows the last 4 years. You’ll notice this line here is indicating this year where supply levels are. We are, as James mentioned, about 19% below the 5-year average as far as supplies go. So, this is where we are now. It sets up a fairly bullish fundamental supply picture, as you mentioned, James. There’s another side to that equation and that’s also the demand side. Why don’t you talk a little bit about that? James: The country is trying to get away from coal - electric power plants. We’re switching off into more cleaner utilization. Natural gas is going to be a big winner with that. Starting this year, having more so in the coming 3 or 4 years, but we are looking at record demand here in the United States for natural gas, combined with the fact that we are some 20% under the 5 year average on supplies sets up a nice bullish situation here for the next 3-6 months. Michael: I noticed, too, when we were looking at this bump for projected record demand in 2018, that came evenly from both residential and industrial demand sides… possibly speaking to a stronger economy, tax cuts, what have you, that are maybe at least partially driving that in addition to what you mentioned with coal fired plants switching over to electricity. James: Right. Definitely a push for greener production of energy here in the United States, and I think this chart shows it really well. Michael: Let’s take a look at a trading strategy here for those of you that are watching this. You put together a strategy here for, and obviously we’re doing a number of different things in our portfolios, but for the person watching at home that maybe wants to try it out or at least just see how it works… this is the strategy you suggested. James: We like the idea of selling September natural gas puts at approximately the $2.25 level. You can see where we’re trading right now. Often, with a seasonal rally that may or may not take place, we think it will this year, I think it’s set up quite well, natural gas is probably going to head up towards $3… maybe $3.10 or $3.20 this summer. We’re going to be some 30-40% above this strike price. We should have very fast decay in selling the $2.25 put. The market should stay a long ways away from it. The whole idea about trading seasonalities or trading fundamentals using short options is look at the variance you have in the market. This is a very large window for the market to stay above. If we have strong fundamentals and if we have a strong seasonality, can natural gas fall below $2.25? Of course it can; however, we really like the odds of this position going forward over the next several months. Fundamentally, natural gas should not fall below this level. Seasonally, natural gas shouldn’t fall below this level and we have record demand this year. It’s definitely a trade that we like going forward. I think it’s a great investment. Michael: So, what you’re saying for those viewing this at home, yes everything looks bullish here. That doesn’t mean it still can’t come down in the meantime to here, here, or here. That’s why you sell the option in the first place. You’re not trying to pick the bottom, you’re just saying it’s not coming here. So, we can go down here and it doesn’t matter what it does, even if we’re a little early or late on the trade, you still win at the end of the day if it stays above that strike. James: All investors know that timing the market is practically impossible. Trying to pick these small swings in the market are very difficult. All we’re simply doing is saying the market’s not going to fall below this level. As long as natural gas stays here, here, or higher, these natural gas puts expire worthless. Of course, as a seller, we get to keep the premium. Michael: Very good. Let’s go ahead and move into our next market, which will be the cotton market. Michael: Okay, we’re back with our second market this month, which is going to be the cotton market. Before we talk about cotton, there’s something I wanted to point out form our last segment in natural gas and the cotton market. These strikes we’re talking about right now have been made available by that last burst of volatility we got from the stock market. These strikes we are looking at probably weren’t available a couple weeks ago. When we’re looking at them now they are. So, this is kind of the fruits that option sellers can benefit from, from these little inputs of volatility into the market. So, let’s talk about cotton. It’s our next market for this month. The first thing we’re going to look at is the seasonal tendency for cotton. Obviously, we tend to see a rally up through the springtime months and then we see a sharp drop off. James, do you want to explain that or why that has tended to happen historically? James: Michael, this chart you can almost mirror over the grains of the United States. Basically, corn, soybeans, and wheat often planted in the spring and then harvested in summer and fall, and as the angst of the weather problems subside, so does the price. Cotton is planted in the south and, of course, it’s planted early in the year. So, as we’re planting in February, March, and April, there’s possible excitement about not exactly perfect weather. Users want to get insurance and they want to purchase cotton prior to planting season. As we reach April and May, we have a very good idea about how much cotton we’re going to be producing that year. End users get to stay off as far as needing to get a lot of cotton around them. So normally, once the commercial buying stops, the market usually starts coming down in May, June, and July. Interestingly, this formation so far has mirrored almost perfectly with what’s going on so far in 2018. We have a really nice setup looking just like this with a decent rally that started about 3 months ago. It’s starting to look like this already. Michael: Similar to that natural gas trade where you have the seasonal pattern tending to line up very closely with what we’re seeing in the actual price chart this year. Let’s take a look at where our fundamentals are this year as we look at the cotton market. The big story, ending stocks, stock/usage ratio… looks like they’re pretty healthy levels this year, James. James: They are. Cotton supplies in the United States are going to probably be exceeding the 10-year level that we had. In other words, we have cotton stocks that are going to be highest since 2007. Supplies look more than plentiful. We’ve planted just a great deal of cottonseeds so far this year in the south, and we’re probably going to have a bumper crop, the weather looks ideal, and planting went extremely well. With supplies in the United States at a 10-year high, the chance for a large rally going into harvest seems quite low. We really like the idea of selling calls. Michael: Yeah, that stocks/usage ratio at 30%... if you’re unfamiliar with the importance of these 2 figures, ending socks and stocks/usage ratio in agricultural commodities, we do have a piece on that on our website. It’s a tutorial. It’s at www.OptionSellers.com/agriculture. There’s just a brief video but it shows you the importance of these 2 figures. They’re the core measurements of supply and demand. They’re both baked into these things. With the highest in 10 years and, James, you alluded to it, next year, if they harvest all the acres they’re planning on putting in the ground this year, we could see these numbers even climb more. Outlook for cotton is somewhat bearish fundamentally, lining up well with that seasonal. Let’s go to the strategy we’re talking about this month. You’re recommending a call selling strategy. Do you want to talk a little bit about that? James: We are. We have cotton trading in the middle 70’s right now as planning season starts wrapping up. We’re probably looking at price pressure in the 3rd and 4th quarter. We really like the idea of selling cotton as high as the $0.90 level. The fact that we’re going to have practically a record supply and a record production this year at a time when supplies are nearing a 10-year high, the chance for approximately 20-25% rally going into harvest seems quite small. Cotton can fall, it can stay the same, it can actually rally quite a bit between now and harvest season. It has certainly a long way to go before we get to our strike price. This option at the $0.90 call strike price is trading around $700-$800. We think that is a very low hanging fruit for later this year and we think that we’ll probably be covering that position around $100 well before option expiration. The decay on that option looks terrific and the odds of cotton reaching that level is quite miniscule. Michael: Excellent. Part of the benefit if you’re using seasonals when you’re deciding which option to sell, these 2 things are almost perfectly matched because seasonals are not a perfect recipe. For right now, the seasonal tendency for cotton, it may not start declining until March or April, if it does at all. Even if you’re here and even if it does rally a little bit more and you’re not right at the beginning, that’s okay because, as James is saying, your strike is way up there at the $0.90 level and you’ve got plenty of wiggle room here to be wrong for a while, so to speak. James: That’s exactly right. That’s why we sell options on commodities and we don’t try and predict the small moves, just based on fundamentals, levels that the market cannot reach and will likely not reach. We’re not correct all the time. Every once in a while, the market might move in that direction, but selling options that far out-of-the-money using the fundamentals is a very good long-term strategy. Michael: If you’d like to read more about our research pieces on these 2 markets, of course they’ll be available on the blog. You’ll also want to make sure you get this month’s Option Seller Newsletter. That should be out at the end of this week, which would be March 2nd. The newsletter will go in the mail and that’s when the e-copy will go out. We will be featuring the natural gas market and trade strategies there. The cotton market will be on the blog, so if you want to read more about those be sure to get them. Let’s go ahead and move into our Q and A section and we’ll answer some questions for our viewers. Michael: We’re back with our Q and A session for this month. Our first question comes from Rob Reirick of Ithaca, New York. Rob asks, “ Dear James, you refer often to credit spreads in your book; however, I rarely hear you mention them in your market segments. Do you still recommend option credit spreads and, if so, why not features on them?” James: That’s a very good question. The layout and the description of our trading philosophy in our book is very detailed. When we’re giving examples for option sales in crude oil or cotton or anything else, we’re basically just laying out primary examples of where we think the market probably won’t reach. We often don’t talk about a more elaborate trade, which is a credit spread. We feel that credit spreads are probably the most opportune way to take advantage of high premiums and, at the same time, have a very conservative position where it locks in certain types of risk as involved with not just being a naked put or a naked call. We are looking at the next 5-10 years of utilizing credit spreads. We don’t talk about them a lot. They are something we’re going to be utilizing a lot in the future. Basically, when we’re talking about examples for option selling, we’re basically talking about straight fundamentals and levels that the market won’t reach. We are absolutely huge proponents of credit spreads and for our clients we will be doing those often now and in the future. Michael: This isn’t the only letter we got on this, James. Because you may want to read more about credit spreads and see examples, maybe we will start incorporating some of those into some of our examples in the future and showing you, the viewer or the reader, how to actually do it. James: As our viewership gets more further along with understanding option selling, I think that’d be a very good idea to elaborate a little more on the actual positioning that we do at home for our clients. Michael: Let’s get to our next question here. This is from Kevin Woo over Cupertino, California. Kevin asks, “Dear James, with the outlook for inflation growing, do you see a favorable outlook for commodities ahead?” James: Good question. As a basket of commodities for 2018 and 2019, we do see it in uptrend in primary prices. Basically, picking out a particular one that might outpace the other ones, I think that’s difficult to do. We’re looking presently at some of the best demand for raw commodities that we’ve seen for probably the last 10 years… from China, from Europe, from the United States. Of course, there’s some infrastructure spending ideas that are coming down the pike here in the United States. We do see commodity prices probably increasing this year anywhere from 5-15%. That might be led by precious metals, that might be led by energies, but, as a whole basket, we do like commodities going forward in the next 12-24 months. Of course, as option sellers, it doesn’t really matter if the market has inflationary factors that do increase commodity prices; however, if we do see that developing and we do see that on the horizon, we simply change our slant to a slightly more bullish factor as opposed to selling calls that are going to be out-of-the-money that are probably not going to be reached. We might utilize more 60% of our option selling as a bullish structure. In other words, selling puts under what we think might be a slightly higher commodities market in 2018 and 2019. I think that’s a great question and we are somewhat favorable on commodities. As a general theme, we do see the market going slightly higher this year and next year. Michael: That’s a great point you made there as well, James. I’m glad you addressed this, because this is a question we get often… “What do you think commodities will do? Is it a good time to be investing in commodities?” The point you made is as option sellers it doesn’t really matter if it’s a bullish or bearish year for commodities. We’ve had some of our best years in bear markets. James: Absolutely. Michael: It kind of goes back to one of those points we’re always making about diversifying your assets. If you have some of your assets in equities, real estate, or what have you, most people invest by buying assets hoping for appreciation. It goes back to that importance of diversification, not only of asset class into that commodity asset class, but also diversification of strategy, where as in what you described, you can benefit even if prices are moving lower, so you have a strategy equipped even in a bear market and you can potentially benefit from that. The importance of diversification is strategy. James: As option writers, you can be diversified to where part of your portfolio is looking for a slight uptick in prices while other markets that, whether you’re in stocks or commodities, and then other commodities might have bearish fundamentals and you might take a slightly bearish stance to those 2 or 3 markets. The idea of being diversified and having a portfolio that doesn’t necessarily need the stock market to rally, the commodities market doesn’t have to rally, this really gives a lot of versatility for a client or ourselves to diversify a client and have them be profitable, whether the stock market or commodities market goes up, down, or sideways. Often the market does go sideways. Right now, we have a very strong stock market, but over the last 10 years it normally doesn’t do that. In commodities, we normally have 1 or 2 really banner years out of 10 but, for the most part, commodity prices realize fair value, and selling puts and calls far above those markets can be very fruitful as we found out. Michael: Of course, if you want to learn more about the entire option selling strategy, you’ll want to read our book The Complete Guide to Option Selling. It’s now in its Third Edition through McGraw Hill. If you want to get a copy at a discount, or you get it at Amazon or in bookstores, you can buy it through our website… that’s www.OptionSellers.com/book. Thanks for watching our Q and A session, and we’ll now wrap up our podcast for the month. Michael: We hope you’ve enjoyed this month’s OptionSellers.com Podcast. James, we have in March, coming up, possibly our first interest rate hike. Do you have any comments on that or things investors might want to watch out for in the upcoming month? James: I think the realization of interest rates going up is going to really hit home. In March, we’re going to have the first rise of interest rates in 2018. There’s a lot of debate whether it’s 3 rate hikes or 4 rate hikes. It’s not going to matter that much. The dollar should be on more firm footing after the 1st hike, and then we’ll see where it goes from there. Higher interest rates are in the future and, we think, the U.S. economy and economies around the world are probably very well ready for that to actually take place. We think that’s going to create more opportunities in some of the strategies that we’re implementing. We’ll see. Michael: For those of you that are considering managed option selling accounts with OptionSellers.com, you probably saw the announcements over the month that as of May 1st, we will be raising account minimums to $500,000 for new accounts only. So, if you currently have an account under that level it’s quite all right. You’ll be grandfathered in, but as of May 1st, all new accounts will have to have $500,000 as the minimum. We are almost fully booked through April, so if you want to grab one of those last consultations through April to try and get in ahead of that minimum change, you can call Rosemary at the office. The number is 800-346-1949. If you are calling from overseas it’s 813-472-5760. Of course, you can always send an e-mail as well to office@optionsellers.com. If you’re watching our podcast today and you like what you read, be sure to subscribe to our YouTube channel. You can also get us on iTunes and, of course, you can subscribe to our mailing list on our website at www.OptionSellers.com. If you request any of our free materials there you’ll automatically get on our list and we’ll send you a notification any time we have new videos or podcasts. Thank you for joining us this month. James, thank you for your analysis on the markets this month. James: Likewise, Michael. Always happy to. Michael: … and we will talk to all of you in a month. Thank you.

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Will Gold's Rally Continue?

Play Episode Listen Later Sep 25, 2017 29:53

Michael: Hello, everybody. This is Michael Gross of OptionSellers.com here with your monthly podcast for September 22nd, 2017. I’m here with head trader, James Cordier. James, welcome to the show. James: Thank you very much, Michael. Always looking forward to them. Michael: Boy, we had kind of a quiet summer and then, all of a sudden, in September a lot of news stories breaking and we saw a lot of volatility start to come into the commodities markets, at least in some commodities, not so much in stocks. James, do you want to talk a little bit about that? Tell us what’s going on. James: Michael, that’s a really good point you make. Often, they call them the dog days of summer just for that reason. A lot of investors and traders alike are kind of taking off June, July, and August. As we went from August to September, a whole lot has been hitting the wire. We have Kim Jong Un lighting off his rockets, yet again. We have interesting things happening in Washington D.C. lately, and there’s always a lot of talk about the value of the stock market, how high it is, and, of course, interest rates in the value of the dollar. Practically hitting on all cylinders here as we start getting ready for the 4th quarter of the year. Michael: Obviously, as commodities options sellers, that is a good thing. If you’re listening, you certainly want volatility. That’s what makes those deep out-of-the-money premiums fatten up a little bit. In addition to what you talked about, James, I know we had a couple hurricanes blow through here, too. It did some things with energy prices, orange juice, and I know you were on CNBC this month talking about that and also Fox Business. A couple commodities there were affected by the storms. James: You know, Michael, you really have to stay informed being a commodities investor or trader. 12 years ago, when we had these hurricanes hit New Orleans, just amazing havoc on oil production and natural gas production. A decade later, practically the same regions are getting hit and people racing to the options screen to buy calls in natural gas and buy calls in crude oil. The storm that hit Houston did absolutely nothing to commodity prices, such as natural gas and crude oil. It did pump up the price of gasoline, as you can imagine with the refiners going down. Boy, was that a great opportunity to sell options as people were watching the news and the weather channel that weekend. Michael: James, that’s a good teaching lesson, too, because I know something you talk about is the people that trade by following the news, and what you always talk about is if you know the real underlying fundamentals, those can be opportunities to go in and sell premium on people selling off the news that aren’t really familiar with the real story and how that could likely really affect prices. James: Well, it’s interesting, Michael, we just go through our day to day business and we’re familiar with the new production areas of natural gas and crude oil. Basically, the Gulf of Mexico 10 years ago was everything, and now they’re producing oil in the Dakota’s, Pennsylvania, Oklahoma, Kansas, and Arizona now for a huge find. You know, you definitely want to be on top of that when the normal investor comes in racing to buy energy calls. We’re more than happy to sell them based on the fact that we probably felt very little impact from the storm this year, and certainly that’s kind of the way that played out. Michael: Well, great. If you’re listening and you’d like to watch James’ interviews on both Fox and CNBC on those commodities, they are available on the media page of our website – that’s OptionSellers.com/media. James, let’s go ahead and move into our first market this month. The gold market: a market that even a lot of non-commodity traders follow. We’ve seen some pretty good strength in the gold market through, not just this year, 2017. Gold prices have been pretty strong, but especially through the months of July and August. We’re off a little bit now in September, but what’s going on there? What’s driving this rally right now? James: Well, Michael, as we often talk about, a lot of investors want to be diversified from the stock market. I think a lot of investors have a particular amount of money in, of course, securities; however, when they are watching all the situations around the world happening and playing out on TV, they see a falling U.S. dollar. The dollar is down some 12% or 13% this year, if you can believe that. Basically, the gold market will mirror to the opposite direction whatever the dollar is doing. You throw in Kim Jong Un and you’re really causing some jitters. It really wasn’t a big surprise that the gold market did rally some $100 over the last month or two. It has been putting on a pretty decent show. It has actually outpaced the stock market for the first time in several years. Michael: James, I know gold is one of your favorite markets to trade, especially given the current levels of volatility. We’re going to give listeners a view into some of our privately managed portfolios with this trade, but that’s fine… we think it’s a good teaching example. I know you had written strangles on there, we had talked about it this summer, it was on our website, you had talked about writing gold strangles. We had some of those on the market that started to rally, and you said, “No, we’re going to let it go. We’re not going to close out those positions on the call side just because we’re getting a little strength here.” Do you want to explain that position and your rationale behind that decision? James: Michael, a strangle on some of the commodities that we follow really gives the client an incredible amount of staying power. If you’re long gold from $950 by selling puts at that strike price and you’re short gold, for example at $1,800 an ounce by selling calls at that strike price, it really gives an extremely large window for the market to stay inside. Generally, gold over the last year or two has been kind of meandering up $25 and down $25. With the recent weakness in the dollar, and the geopolitical concerns that we’ve had, especially with North Korea, the gold market rallied real rapidly- practically $100. It went from $1,260 to basically $1,360 an ounce almost overnight. Our short positions did pressure us a little bit. Basically, I really had a strong feeling that the 3rd leg of pricing gold is inflation. Yes, you can have a weak dollar- that’s bullish for gold. Yes, you can have geopolitical concerns- that’s bullish for gold. The missing piece to the gold market rally is inflation. Basically, gold is a hedge against inflation and, as we all know, Japan tried creating inflation with 0% interest rates. Here in the United States we’ve done the same, and there simply isn’t any. We thought that the rally in gold would be short lived and we’re not exactly sure, day to day, where it’s going to travel to, but we backed off a quick $60 or $70 over the last couple of days and we’re very glad we stayed with our short positions in gold. It’s not getting to $1,800, at least it doesn’t look like from my desk, and any time it rallies we’re going to be likely selling it over the next 6-12 months based on the same idea- no inflation. Michael: Boy, that’s some great lessons in there if you’re listening and you’re just learning how to sell options. James is talking about selling calls deep out-of-the-money, high above the market. We had strikes on both sides, puts and calls, so when gold market rallied, if you’re short futures you’re probably getting stopped out there, or even ETFs you’re taking a beating, whereas our strategy with selling both sides of the market, even though those calls got a little bit of pressure, the puts were making up for some of that on the backside. When gold inevitably starting coming back down, the premium comes out of those in a hurry, doesn’t it James? James: It really did. A lot of the calls that we were short were double the value that we put them on at. We are now profitable our short gold calls in less than a week. It’s just a great lesson for people listening in and following us and for ourselves, as well. We learn on every single trade we make. Using our compasses, we thought staying short was the right idea and we continue to think that probably through the end of the year, as well. Michael: Good. Something else you bring up there… the option doubled, we held them, and a lot of people that read the book or read some of our materials say, “Well, I thought you were supposed to get out when it doubled.” That’s an excellent point and we’re going to be talking about that a little bit later today and today’s lesson. One of the reasons is we had a strangle on so we had a lot more leeway, but we’re going to talk about risk management here and some more advanced strategies later in the podcast here. For now, James, I know I said I wouldn’t put you on the spot, but the title of today’s podcast is Will gold’s rally continue? What are your thoughts here through the end of 2017? I know our job isn’t to pick what the market’s going to do, we only have to pick what it’s not going to do, but for people listening, maybe they don’t do this yet, maybe they’re thinking about selling options, but what’s your gut feel here? Do you think a rally continues through the end of the year or do you think we may be reaching some value levels here? James: Michael, that is a great question. The gold market is something near and dear to many investors. You can talk to clients about the price of cocoa, they might not be familiar with where that’s trading at, or soybeans, but a lot of investors know what the price of gold is trading at for one reason or another. They probably have some stashed away or it’s something they might be interested in purchasing. The gold market has a personality. It’s not necessarily all supply and demand, like soybeans or crude oil or coffee, a lot of it is perception. One week ago, the North Koreans were slapped with the harshest situations as far as deterring trade, you know, going to that country. The sanctions that were levied on them were thought to be the strongest ever. Two days later, Kim Jong Un is lighting off missiles. That seemed to really ratchet up the rhetoric and the tensions that day. The gold market traded up $7 that night. The following day after the day traders were able to get a hold of the price of gold and trade it, it closed lower the day after Kim Jong Un was lighting off missiles. That tells you that that market had topped out. Certainly, hindsight is 20/20, but it did fall some 7 days in a row since then. That tells us that a very important top was made in gold for the remainder of the year. I think fair value for the beautiful shiny yellow metal is probably $1,275 to $1,300 and we have a decent economy, we have no inflation, we have interest rates about to rise, and that is going to take a lot of the steam off of the bulls, as far as the gold market’s concerned. If you read the Wall Street Journal just 2 weeks ago, it went on and on about small investors are long, ETFs are long, large investors are long. If you follow along with that, investors listening to us today, that basically means anyone who wanted to buy the market was already in, and you’re going to see large investors pull out and take profits when that’s the case. I think that’s what we just saw and we just made an important top in gold that will probably last at least the next 3-6 months. Michael: All right, that makes a lot of sense. As far as investors maybe looking to trade gold or maybe use some of our strategies, obviously a rally like this helps us because it pumps premium into those call options. Even after the sell-off, do you think there’s still an opportunity there for investors to go in and still take premium on the calls side of this market? James: I think so. We have a couple of important announcements by the FED over the next day or two. We have some very large decisions made by the EU coming up over the next week or two. You can basically play the middle of gold right now if you just can’t fathom being short the gold market and you can’t fathom having a short gold call in your portfolio. We really like selling the 1050 gold puts, in other words the $1,050 gold put strike. We think that’s a great idea, but we are neutral to negative gold. We don’t see it going that low. That’s some $200-$250 lower than where we are right now. That’s a great window for gold bugs to participate in being in the shiny metal. Being neutral to negative I would sell the $1750-$1800 gold calls. I think that is a very low hanging fruit and I think the beginning of next year those would start being very profitable for anyone selling those. Michael: So, that’s for gold. That’s about a $700-$800 profit window that gold prices can move around and still those options would expire worthless. That’s a pretty wide range. James: You know, trying to get gold’s next $25 move is difficult. Can you imagine how many small investors and large investors alike poured into gold here the last 30 days? They’re probably going to be waiting maybe a year or two to see the market come back to that level or get slightly above it. Positioning yourself $500 above and $200 below, I know that’s not the typical investment in gold, but if you take a look at it, it might be for more investors than what they might think. Michael: Good. James, I know you’ve been tweaking some strategies here. Some of our strategies we’re going to be using for our privately managed clients as far as option selling goes, but if you heard James’ commentary here, for anyone listening, he’s just giving you a sample strategy you can possibly even use at home of a gold strangle. If you’d like to read more about strangles and other option strategies we recommend, I do suggest our book The Complete Guide to Option Selling: Third Edition. If you’d like to get a copy of it for a lower price than you’ll get at Amazon or at the book store, you can get it at our website, OptionSellers.com/book. James, let’s move into our second market this month. We’re going to move over to the grain markets, in particular the soybean market. For those of you that have listened to our commentary over the last 4-8 weeks, we’ve talked a lot about the upcoming harvest, and seasonally in soybeans, harvest time is when supplies will be at their highest. Typically, when supplies are at their highest, Economics 101 dictates that’s often when prices will fall to their lowest level. That’s why you see the seasonal chart tends to decline right into the fall and October is when harvest tends to get in full swing and then wrap up at the end of October and early November. So, often times you’ll see prices make a low around that time of year, but then something different happens. We kind of reversed that. James, do you want to talk a little bit about that? We have a change going on possibly this month in the seasonal pattern of soybeans. James: Yes, Michael, that’s exactly how it follows out. I’ve been looking at soybean seasonal charts here quite a bit. I have one very near to me right now. June and July we have weather scares and the soybean market rallies. It falls off as the scares seem to be not as defined as previously thought. The soybean market and the corn market have fallen steadily since the 4th of July. This is truly the seasonal bottom coming up practically every year at the end of September and beginning of October. Looking for a possibly different trading approach might be up on us here in the next 4-6 weeks. Michael: Yeah, and looking at soybean prices we had a pretty good nosedive into August. Sometimes that could have been a seasonal low there, I don’t know. We’ve rallied a little bit since then. We’re going to see a secondary low in October; possibly, it’s hard to say at this point. We may get the low in October or we may have already seen it in August, but the fact of the matter is after October and November prices have historically tended to start strengthening. That’s when a lot of those forward sales and those orders start to get filled and it starts to draw down inventories again and, often times, you can see soybean prices firm. Now, if you’re listening you would think, “Well, then we would want to sell puts”, but that’s not necessarily the case. James, you made a case for this in our upcoming newsletter this month. Maybe it’s the better strategy to employ the think strategy we just talked about here in gold. James: Michael, I really think it is. Seasonally, we’re going to have very good support under soybeans. At the same time, we have carryover from this year’s production practically as high as we’re ever going to see it in the past 10 years. That will likely keep a cap on soybeans. Once again, when finding a fairly valued market, that is just a great deployment of selling calls way above the market and selling put strikes way below the market. This fall and this winter for soybeans, it may be ideal for that. We have large supplies likely to hold the market down and we have a very strong seasonal tendency for the market to rally that might be the perfect equation for probably a sideways market at a time when both puts and calls are quite expensive. It might be setting up extremely well and something we’re going to be paying very close attention to as we speak. Michael: It really makes a lot of sense, because that seasonal does carry a lot of weight. At the same time, soybean stock is 475 million bushels. Not only is that going to be the highest in over a decade, but it’s the second highest in over 25 years. So, the supply levels here in the United States are pretty sizeable, yeah we could still get an adjustment in the October report, but for the most part it looks like we’re going to have a pretty sizable crop. I see what you’re saying- that could tamper that seasonal a little bit and keep prices in a nice defined range. Good thing about strangles is you’re getting double premiums. You’re getting premiums on both sides of the market. Those can be big income earners to pad an account. James: Michael, absolutely. So often, people are trying to define the next bull market or the next bear market, but when you’re able to identify a sideways or fairly priced commodity, that can be the best of both worlds. As you’re short one side of the strangle, it’s basically taking care of the other one while you’re waiting for decay. As option sellers, patience is the name of the game, and having a strangle on as your key position can really help, not only a portfolio, but help the manager taking part in deciding what to do as you have the trade on. Michael: All right… pretty good stuff. For those of you that would like to read more about the soybean market, we are featuring it in the upcoming October Newsletter. You can see the seasonal we’re talking about and also take a look at the fundamentals we’re looking at, get James’ analysis and possibly strikes you can look at if you’re trading at home. Obviously, if you’re interested in a managed portfolio, you can request our information pack on that, as well. As far as our lesson this month, James, we’re going to address something this month that we probably get more question on than anything else. It’s because it’s a very important topic and that is kind of a broad question, but it is “How do I manage risk on my short options?” We do have a whole chapter dedicated to this in The Complete Guide to Option Selling. We talk about it a lot in our videos and seminars, but I think we should cover it here because there’s a little bit of confusion as to what’s the best way, what’s the right way, etc. What we’ve put forth in our book is what we recommend to beginners, people either new to commodities or new to option selling, is the 200% rule. It’s a good basic rule; it keeps you out of trouble, if the option doubles then you end it, end of story. We still think that’s a good rule and I know you think that’s a good rule, as well. When we’re managing a portfolio with $100 million in it, we have the ability to have a little bit more leeway, we can use a little bit more advanced techniques to bump our odds up a little bit. I know there’s a couple you use and I thought maybe this month we’d pull back the curtain a little bit and let people see some of the more advanced techniques that we may use in managing our portfolios. Do you want to talk about that a little bit, James? James: You know, Michael, we make a great deal about fundamental trading simply using the 200% rule and, if you’re trading along with the fundamentals, I think a portfolio would do very well over a 1, 2, 3 year period. As far as making a more sophisticated exit level and risk parameters, we do utilize more parameters than just the 200% rule. Basically, we’re going to sell options on what the fundamentals dictate. If there’s too much cocoa in the world then we’re going to look to sell calls. 9 times out of 10, the fundamentals in cocoa that brought us to get into that position won’t change over the next 6 months. Generally speaking, a rally against the fundamentals is technical in nature and we can watch open interest, we can see who’s actually doing the buying and who’s doing the selling, and if it’s technical in nature and possibly the option did reach a double level or even more so, I’m going to look at the landscape of the cocoa market or the gold market, whatever the case may be, and if the fundamentals remain the same we will give that trade more leeway. If, for example, we were talking about gold earlier, and all of a sudden we are getting inflation and inflation is at 2, then 2.2 and 2.4 and 2.6, that is a change in fundamentals and you would definitely want to use the 200% rule. As a matter of fact, in a case like that you may not wait for it to reach that level. Being nimble selling options, there’s nothing wrong with that. If you simply want to use the 200% rule, I think, over a 3-5 year period you’ll do extremely well. We follow the fundamentals in commodities so closely that often it’s a technical rally or a technical decline in the market and, for that reason, we’ll stay with a position longer than just a simply percentage rule. Michael: So, you’re saying that’s why you sell options so far out-of-the-money. You give it so much space to move and you have a little bit more leeway because you may have a little bit more insight into what’s actually going on with prices. For the guy out there on the street that’s saying, “I like this 200% rule, but what if I want to employ something else? What if I am looking at some other things?” I know you’ve used a couple of things, but one of them is at times if the fundamentals stay the same you may roll part of that position. Can you talk a little bit about that? James: Absolutely. If you’re selling puts because you’re bullish the market and it’s falling, you might want to scale back a half of your position that you have in the puts and then just roll down to the next 1 or 2 strikes below that. Generally, the selling or the buying based on technicalities will be short-lived. You don’t necessarily just want to leave your position because of something a headline that was in the Wall Street Journal or one of the business channels. Rolling your position allows you to stay with your initial fundamental analysis. Michael: That makes a lot of sense, too, James, because I know when you get into rolling and, another strategy you mentioned is gradually scaling out a position rather than just closing out the whole thing, that gets into a little bit more art than science. It gets into kind of a feel for the market kind of to know what’s moving it. For the person that has just joined us on their own, they may not have the skills to employ that art, whereas the 200% rule is very scientific, it’s very numerical, it’s very definite. Yeah, you’re probably going to get out of a few trades that at the end of the day they’ll still expire, but it’s the only way to keep you out of the ones that are going to cause you trouble down the road. That’s a great point to make and for those of you listening, if you would like to learn some of our more advanced risk techniques, we mention a couple in The Complete Guide to Option Selling, as well. We also talk about them in some of our upcoming videos that you’re going to see this fall. So, if you watch our videos on our blog, we’re going to be talking a little bit more about the risk management, as well. Just a little housekeeping here before we go this month. For those of you interested in discussing a potential new option selling account for the 4th quarter, we are fully booked for October. Rosemary is currently scheduling consultations for our available openings in November. We do have a few of those left. If you would like to schedule a consultation, feel free to call her at the main number… 800-346-1949. If you’re calling from outside the United States, you can reach her at 813-472-5760. You can also inquire on availability by e-mail… that is Office@OptionSellers.com. James, thank you for your insights this month. James: My pleasure, Michael. Always enjoy being part of the show. Michael: We will talk to you all next month. In the meantime, have a great month of option selling. Thank you.

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How to Take Big Premiums From Weather Markets Now

Play Episode Listen Later Aug 4, 2017 38:59

Michael: Hello, everyone. This is Michael Gross from OptionSellers.com here with your August edition of the Option Seller Podcast and Radio Show. James, welcome to the show this month. James: Hello, Michael. Glad to be here and always fun to do. Michael: We find ourselves here in the middle of summer and, of course, summer weather often times can take headlines in the agricultural commodities. That’s what we’re going to talk about this month. We have several things going on in some of our favorite agricultural markets. In the Northern Hemisphere, of course, we have growing seasons for crops, such as corn, soybeans, and wheat. Down in the Southern Hemisphere, we have winter time, which is actually an active time for some of the crops they grow down there because you have crops like coffee and some of the other countries, cocoa, that aren’t planted every year. There’s trees or bushes that tend to bloom every year, so winter can often be a time to keep an eye on those, as well. James, maybe to start off here, we can talk a little bit about weather markets themselves, what they entail, and why they can be important for option writers. James: Well, Michael, many, many years ago, my introduction to commodities investing/trading came along in the summer. There was an incredible hot spell and dry conditions in the Midwest in the United States right during pollination time. That was my introduction to commodities and commodities trading. Weather markets, especially in sensitive times like July and August for the Northern Hemisphere, certainly does bring a great deal of volatility to prices and great opportunity for a weather market to grab hold of particular prices, and that was my introduction into the commodities trading. I’m quite sure that, as summer heats up, of course, here in the United States, so does trading and certain commodities and it looks like we’ve hit that start up again in 2017. Michael: Okay. Being in these markets as long as you and I have, we’ve seen our share of weather markets. After a while, most of them tend to follow a typical pattern. You see a weather scare, you see prices rise in some commodities, and prices tend to immediately price-in a worse case scenario and then you get the real report or then it rains or whatever happens, and then prices tend to force the back-pedal… not always, but most of the time that tends to be the case. If there is a price adjustment upwards necessary, prices will often do that, but often times that spike often comes in that initial wave of buying, and that tends to have an affect on some of the option prices. Would you agree? James: Well, certainly a lot of investors who trade seasonally, or perhaps had taken advantage of weather rallies years before, they will look at the option market. Generally, they are not futures traders, so what they might do is they’ll say, “Well, if the price of cotton or the price of corn or soybeans might be going higher because of dry conditions, lets see what options are out there for me to buy.” I would say that the biggest spike, not only in prices, but in prices for call options, particularly, often happen during these weather phenomenons, and so be it. The call buying that comes into the market during these weather patterns. Usually, as you mentioned or alluded a moment ago, it usually winds up being the high as the public pours into the market. It has happened many times in the past and seems to repeat itself time and time again. Michael: Yeah, that’s a great point, too. You’re talking about that you have a lot of the general public who love to buy options, the media loves to pick up on weather stories and the public reads it, and it tends to feed on itself, and you have public speculators coming in that are buying up options, often times deep out-of-the-money options. These are often times that people who know the fundamentals want to take a look at that and say, “We could take a pretty good premium here with pretty reasonable risks”, and that’s obviously what we are trying to do and what people listening to us are trying to do. So, why don’t we go ahead and move into our first market because we do have a few other markets to talk about this month. First market we’re going to talk about is, actually a couple markets, is the grain markets as a whole, corn, soybeans, wheat, all being affected to some degree by some of the weather. These aren’t raging weather markets, it’s not on the national news, but they’re enough to get those option values up and certainly enough for people listening, or our clients, to take advantage of. When we talk about these, I think we’ll probably focus on soybeans and wheat for this session. As we talked about in our newsletter and in our blog, there has been some drier weather, especially in some of the northern growing regions up in the Dakotas. Recently, I read a little bit about it possibly moving down into Illinois and further into Nebraska. So, they’ve had some dry weather and this has had a particular affect on wheat, but also on soybean prices. Maybe you can just explain how that worked and what transpired there to push those prices higher. James: Michael, it seems that a weather market can come in just practically any portion of the United States. Years ago, Illinois, Indiana, and Iowa, that was the extent of the corn-belt, with fringes of Wisconsin and Minnesota. With high prices in commodities over the last several years, some of the other areas of the United States, people started planting corn, soybeans, and wheat, as you mentioned. This year, the extreme heat and dryness is in the Dakotas, usually not an area that moves the market as much, but this year it did. I know the media really got a hold of the dry conditions and discussed North Dakota and South Dakota, some of the hottest, driest conditions in over half a century. I know I had CNBC calling practically every day to talk about the weather. That is what gets these markets moving, and it usually happens this time of the year. You alluded, once again, to something that happens often is you’ll have these headlines really create havoc with some of the markets and pushing them higher, but, lo and behold, some 95% of the crop is really untouched as it is in decent growing areas as far as the weather goes. As you get into harvest time, a lot of that talk is now behind them and people forgot about the weather in North Dakota and South Dakota 6 months later. That seems to be developing again this year. We’ll have to wait and see how that plays out. Michael: That’s a great point. Probably we should point out here the backdrop of what this weather market is operating in. Exactly what you described is happening, of course, you have speculators buying soybeans off of the dryer weather, buying call options off the dryer weather. As of the last USDA report, 2017-2018 ending stocks are pegged at 460 million bushels, which is going to be the highest level since 2006-2007. So, we’re going into this with a pretty burdensome supply level. Now, if there is some reduction in yield, yes, that could come down a little bit - something to keep an eye on. You also have global ending stocks 93.53 million tons. That’s pretty substantial, as well. You’re operating on it being a pretty hefty supply environment. At the end of the day, when we go into harvest, prices tend to decline, regardless of what the actual supply is because that’s when the actual supplies are going to be the highest regardless. We’re fighting that big picture of, “We already have hefty supply and we have a seasonal working against the prices here.” So, two reasons why people listening may want to consider selling calls when you do get weather rallies like this because the bigger picture is not that bullish. Secondly, one thing to point out here is we’ve had problems with dryness up in North and South Dakota, possibly coming a little bit further south, latest weekly crop condition report is a 4% decline in good-excellent rating. They’re starting to reflect some of that damage, but one thing to remember is this happens often. It happened last year. It happened a couple years before that where it was dry in July and everybody was talking about weather. Then, they’re talking about pushing yields back a bushel or two an acre and then it rains in August, then all the sudden we have above average yields. So, you have prices right now that can, you can get a little pop or you can also see them roll over. I know you have a favorite strategy for playing markets like that. James: Well, Michael, we wait for volatility to come into the different markets that we follow. Certainly, a weather market in summer is one of those. Probably the best way to approach selling options, whether it be calls or puts in a weather market, is to do it with a covered position. Basically, a strategy that we cover in Chapter 10 in The Complete Guide to Option Selling: Third Edition, it’s really an ideal positioning for weather markets. Basically, what you’re doing is you’re selling a credit spread where as you are selling whatever item you think that the market can’t reach, for example, soybeans this year trading around $10 a bushel based on supply and demand probably won’t be reaching $12.50 or $13 a bushel. What you might look to do is do a credit spread where you buy one call closer to the money and sell 3, 4, or 5 calls further out. The one long position is basically insurance on your shorts so that while the weather is still in the news and while there is still quite a bit of jitters as to how much crop potential we might lose this year, that holds you in the position. You’re basically short with just a little bit of protection and that really does a great job in riding the investor through weather markets and if you are fundamentally sound on your picture of what the market will likely be, as you mention, we have some of the largest ending stocks in some 10 years, you do want to be short this market at harvest time. By applying a credit spread in July and August is a great way to get involved with the market and protect yourself while you’re waiting for the market to eventually settle down. Michael: When you’re talking about and referring to the ratio credit spread, that really eliminates the need to have perfect timing. Of course, all option selling you don’t really need perfect timing, but that really helps out. If you do get a rally, those can be opportunities for writing spreads just like that. If you’re already in it and the market rallies, you have that protection, a lot of staying power there, and when the market eventually does turn around there is a number of different ways you can make money with a ratio spread. Of course, at the end of the day, we want them all to expire. Talking about soybeans right now, this does not look like any type of catastrophic yield loss or anything like that. This looks, at the most, if we get something, they might get a few bushel break or reduction prices may need to adjust a little bit higher, but in that case sometimes a ratio spread can work out even better. Is that correct? James: Well, Michael, it’s interesting. Your long position, for example, in soybean calls or corn calls or wheat calls, there’s a chance that that thing goes in-the-money and your short options stay out-of-the-money. That certainly is an ideal situation for the ratio credit spread, where, basically, the market winds up being between your long options and your short options. That happens rarely, but, boy oh boy, is that a great payday when it does happen. That’s not why we apply the ratio credit spread, but every once in a while you get quite a bonus. That describes one extremely well. Michael: All right. Let’s talk about wheat just a little bit. A lot of the same things going on in wheat, but wheat is affected a little bit differently than the beans, primarily because we have a lot more wheat grown up in those regions where they’re having the trouble. In fact, I read here, as far as the drought goes, North and South Dakota, I don’t have the stat here in front of me, but it’s somewhere between 72-73% of the acreage up there is considered in drought right now. So, a lot of wheat is grown up there. At the same time, that’s one of those markets that may have priced in a worse case scenario and now backing off. What do you think? James: You know, the wheat market probably, it does have different fundamentals than corn and soybeans, clearly, it has rallied over $1 a bushel, which would have been about practically 25% when a lot of the discussion about the Dakotas was taking place. The wheat market looks like it’s priced, you know, the heat and dryness already in. Of course, one thing about the wheat is it’s grown in so many locations around the world that if you do have a loss in production in the Dakotas in the United States, there are many places around the world ready to fill in for any loss in production. All around the world wheat is grown in probably near 100 countries… certainly different than corn and soybeans. Michael: You made a great case for that in the upcoming newsletter, too, the piece about wheat, where all this talk about loss of yield to the spring wheat crop, but that only represents about 25% of the overall U.S. crop. Most of the crop grown here is winter wheat, which wasn’t as heavily affected. The bigger point is the one you made just now. This thing is grown all over the world. The United States only produces about 9% of the wheat grown in the whole world. Right now, world wheat ending stocks are going to hit a record level in 2017-2018. So, again, you’re looking at a little news story here, but when you look at the bigger picture we are going to have record world supply of wheat this year. Again, these can be opportunities for writing calls for when those bigger picture fundamentals start to take hold. It can certainly help your position. James: Exactly. This year, I think, was another great example of that. Ending stocks possibly being records. It’s almost an ideal situation when weather problems arise because later on that year, lo and behold, we have more wheat than we need and the price goes back down. Weather rallies, whether it’s the Southern Hemisphere or Northern Hemisphere, really often plays into the hands of option sellers because the buyers come out of the woodwork and normally, you know, holding the short end of the stick come harvest time. Michael: We should find out where everything plays out in the next USDA supply/demand report. I believe that is on or around August 10th. That’s really going to reflect what the real picture is, if there was yield loss, and how much of it was. If it’s less than traders thought, prices probably roll over and we’re probably done because you have soybean podding in August and markets typically start declining after that anyway. If we do get a little bullish surprise, we’re not saying the market can’t rally if you’re listening at home and saying, “I need to go hands-in short right now”. The market can rally, especially on or around this report if you get a bullish surprise. What we are saying is those can be opportune times to write options, because that’s when that volatility will jump and, overall, the bigger picture fundamentals remain bearish. James, we’re going to talk here a little bit about our next market, but before we do that, anybody listening to our conversation here about the grain markets this summer, you’ll want to read our August issue of the Option Seller Newsletter. That comes out August 1st. It will be received electronically and it will also be available on hard copy newsletter in your mailbox if you’re on our subscriber list. We have a feature article in there on wheat. We talk about credit spreads, some of the things James and I just discussed here, and how you can apply them. It is a great strategy for this time of year and you can read all about it in the August newsletter. If you aren’t a subscriber yet and you’d like to subscribe, you can subscribe at OptionSellers.com/newsletter and read all about it. James, we’re going to move into our next market here this month, which is one of your favorite markets to trade, that is, of course, the coffee market. I know you’ve been doing work with Reuters World News this month back and forth on the coffee market and what’s going on there. Maybe give us an overview of what’s happening in the coffee market right now. James: Michael, it’s interesting. As all of our intelligent readers and watchers already now, as temperatures heat up in the United States, they are definitely cooling off in the Southern Hemisphere, Australia and Brazil for example. What so often happens for traders in the coffee market, they look at winter approach in the Brazilian growing regions and they remember back to when coffee supplies were really cut based on a freeze that developed in Southern Brazil. During those periods, some 1/3 the coffee crop that Brazil makes each year was grown in very southern areas of Brazil, which are prone to cold weather. Chances are freezes don’t develop in the coffee regions of Brazil, but just like the dry weather in the United States a lot of investors and traders want to trade that idea of it happening. That’s what’s going on recently as we approach the coldest times of the season in the Southern Hemisphere. Traders and investors are bidding up the price of coffee and, likewise, buying calls in the coffee market, planning on maybe some adverse weather taking place. I think we all hear about El Niño and La Niña and what that can do to temperatures, both north as well as south, and a lot of investors, if something like that takes place, they want to be in on it. Often, how they do get involved with that is by buying calls in coffee, cocoa, and sugar, and it looks like that’s what’s pushing up some of those soft commodities today. Michael: Okay. So, they’re buying it primarily on freeze-type thing… same type of thing going on here in reverse. Instead of hot weather, they’re betting on cold weather. Talk a little bit about the bigger picture there as far as what supplies are like, what they are buying here. James: Well, Michael, it’s kind of interesting. It’s almost like a carbon copy of what we just discussed on the grain and grain fundamentals. Coffee supplies in the United States, which, of course, is the largest consumer of coffee in the world, are counted each month. Here in the United States, we have something called green coffee stocks. Obviously, that is the coffee that is then sent to roasters. Roasters roast the bean and then turn it into everyone’s favorite morning brew. Green coffee stocks in the United States are at all-time record highs. That fundamental is something that just is very discernable and is not going to go away no matter how many coffee shops spring up in your city or your town. We have record supplies in the United States. As far as the fundamental of new production, especially in Brazil, last year we had a rally in coffee prices because it was dry conditions during some of the cherry season in Brazil, and this year is just the opposite. We’ve had extremely favorable weather conditions. We have an excellent coffee crop that’s being harvested right now in many parts of Brazil and Columbia, and coffee supplies that will be coming in from the producing nations will be more than plentiful as we get into August, September, and October when those harvests wrap up. So, we have practically record supplies around the world, we have excellent growing conditions in the largest producer in the world, being Brazil. This year is what’s called an off-cycle year. A coffee bush, if you will, produces more cherries on one year and then slightly less the following year. This being an off-cycle year, still we are expected to have a record production figure in Brazil for an off-cycle year. There are already estimates for next year’s crop being in excess of 62 million bags, which would be an all-time record. For those of you who are unfamiliar with what 62 million bags of coffee might represent, Columbia, always thought to be the largest coffee producer in the world, they only grow approximately 10-12 million bags each year. So, all of the extra demand for coffee recently over the last several years from all the coffee shops springing up, Brazil has taken care of that and then some, just basically blanketing the world with extra coffee beans. That is what has kept coffee prices, really, trading near-low levels. Many commodities have increased with Chinese demand that everyone is familiar with over the last several years, but coffee is not the case. Record supplies here in the United States and record production down there from our friends in Brazil. Michael: Yeah. I saw that, too. Brazilian Ag-Minister was 62 million bags. That’s a huge crop. Another thing I should probably mention there is that coffee has a seasonal, as well. It tends to start coming off into when harvest starts and our springtime as they head into fall, which is March-May period. Is that correct? James: It is. Generally, the coffee crop is so large and so widespread there the harvest lasts practically 4-5 months. Basically, what you’ll see them do is often sell coffee twice a year in great strides. One is as the end of harvest approaches and then when we’re looking at next year’s crop, May and June, when they can get a handle on how large that crop is going to be, they will then start forward selling that year’s production. So, really there’s two waves of selling from coffee producers in Brazil. Usually it’s August-September for the current harvest and then May-June for the upcoming harvest. Really two large swaths of sales from Brazil, something we’re expecting to happen probably for at least the next 2 years and then we’ll have to take a look at how the conditions look after that. The next 24 months, we’re going to see a lot of coffee hit the market twice a year, those 2 times especially. Michael: I did notice, this year the coffee market does appear to be following seasonal tendency. You know, we started seeing this last round of weakness right about March and it has dropped, so far, into June. We get a little bouncier now maybe just because prices were just so oversold and then we had the weather issue that you spoke about, as well. I know, right now, with prices in the position they are similar to what we talked about in wheat and soybeans, where you had a little bit of a weather issue at the same time big picture fundamentals still looking pretty bearish. What type of strategy are you looking at in coffee right now? James: Well, Michael, we have coffee prices in the mid 1.30’s, approximately $1.35 per pound. Chances are we are going to be rallying maybe 5-10 cents as we go further into the winter season in Brazil, as some investors take a chance on coffee price rally. We could see coffee prices in the mid $1.40 going into August and September. We are targeting contracts 6 months out- 9 months out to take advantage of the long-term bearishness. We never want to play a market on a short-term basis, we don’t want to predict where coffee’s going to go the next 2-4 weeks. What we want to do is take our long-term fundamental analysis of the coffee market, the production and supply that we’re looking at here the next 24 months, we’re going to take a long-term view of coffee… a long-term bearish view. We are able to now sell coffee calls at $2 a pound if you go out a little bit further, another 30-60 days, you can sell coffee options at $2.20 a pound. If we do get a decent rally here in the next 30 days, which is possible, we’ll be looking at selling coffee calls at $2.40 and $2.50 a pound. Later this year, we do expect coffee prices to be around $1.20-$1.25, and there’s a pretty good chance the options we sell are going to be double that level, certainly something we’re extremely comfortable with and we think is going to work out quite well. We’ll have to wait and see. There’s no guarantee in this market or any other, but we do like our chances at selling coffee at that level, for sure. Michael: That far out-of-the-money is exactly the target options that we talk about in The Complete Guide to Option Selling. It’s our third edition of our flagship book. If you would like to get a copy of that, you can get it at OptionSellers.com/book. You’ll get it at a discount to Amazon or bookstore prices. James, for our lesson today, I’d like to directly address a question that we get periodically from newsletter readers and listeners to this show and some of our other videos. I know a lot of people listening to this, they’re watching what we talk about and then they are taking our trade and trying to do it on their own. That’s certainly fine and there’s nothing wrong with that. That’s part of the reason we’re here, is to help people learn what this is and how to do it. A question we get is, “I saw your video/read your article and you talk about selling a strike, and I went and looked at that strike and it’s not the same premium you said,” or, “ I went and looked at it and there’s no open interest there”, or “That platform doesn’t have it. I can’t see it. How are you selling these things?” There’s a couple different answers to that. I’m going to give one and I know you probably have a better one, but one of the first reasons is a lot of the platforms they’re on they don’t carry options that far out. I know some people have mentioned Thinkorswim platform or TD Ameritrade where they only go a few months out with the commodities options. So, first and foremost, you need to get yourself a better platform so you can get further out strikes, and secondly, James, the one thing you pointed out clearly in this month’s newsletter is a lot of times when you’re talking about these things, whether here or on your bi-monthly videos is, you’re giving examples of how this could work, how it should work, what might happen if prices rally, these are the areas we target. We’re not here to give specific trade recommendations for people to take and trade tomorrow. These are examples for people to learn either if they want to invest their money this way or if they want to take the information and think and reason it on their own what to do. So, when we talk about a strike, that could be a trade we’ve already done, could be that it’s passed now, or it could be a trade we’re hoping to do if the right situation sets up. So, you just gave some pretty good examples right now and you probably agree with me there, but there’s another reason that we can target those type of strikes that other people might not be able to do, and maybe you want to talk about that. James: Michael, that is a great point that you bring up. When I’m speaking to new clients, when they first open their account, the one question that seems to come up very often is, “James, I understand how this works, I’ve read your book, I’ve read your material, but who in the world is buying these options?” That is certainly a question we often get. By no means do I claim to experience the very best way in selling commodities options. I’m not sure what the very best way is. I just know what works for us and really being the option selling leader, I certainly believe we are, we are selling options in quantities that practically no one else in the world is. We have the luxury of selling gold options to banks in London and New York, we have the luxury of selling options in the crude oil market to energy companies, and it’s quite possible that when we’re selling options distant strikes coffee, we are likely selling them to coffee companies, like Starbucks and the such, a lot of popular names that a lot of people now. When you’re selling to contracts for your particular own personal account, you’re probably not going to get a chance to deal with London banks or other large coffee companies, but when you’re selling options in very large gross volume, these companies do want to work with you and they do want to listen to you. That opens up these strikes to us. Michael: That’s a great point. Maybe for just some of our listeners that may not be familiar with how that is, it’s not like James is getting on the phone and calling somebody in London and Citi Bank and asking them if they want to buy our options. These are still going through registered exchanges, it’s just a different path we are taking through them where we are working through specialized order desk. These people have relationships with other brokers for these organizations, but the trades are still done on the registered exchange, correct? James: Yes, they definitely are. It’s just relationships that our clearing firm has established and it’s something that, I feel, just the pinnacle of option selling… having those relationships in place and when you need and want to sell options that are further out in time, as maybe some of our listeners or readers have asked about, that’s something we have the luxury to do and we certainly want to take full advantage of that by selling to some of the largest banks or some of the largest companies that are maybe end users in coffee or in sugar or in soybeans. It’s quite a luxury we have working with those relationships that our clearing firm has already built for us. Michael: Something our listeners might want to consider, as well, we are usually here to help people learn how to do this. Whether you want to do it on your own or whether you are considering having it managed, one aspect of managed option selling, and excuse my little advertisement here, but it’s true that if you’re in a managed portfolio, such as this, you do get the advantage of economy of scale, where if you’re trying to sell 2-3 options on your own you could have them sitting out there all month and nobody ever looks at them. When you’re with an organization or a managed situation like this where you could be selling thousands at a time, those not only can get filled but often times at better fill prices than you’re going to get electronically. I know that’s something you have experienced first hand. James: Michael, there is no question that we’re not market timers. We don’t know the exact time to get short soybeans, coffee, or get long some of the precious metals, but what we do want to have is just the best absolute liquidity available, the tightest bid-ask on these markets, and if that can change your entry by, say, 10%, which it often does, once again, it takes the need to be perfect timing entering these markets, which no one has, nor do we, but when you can get a fill 10% better getting in and then possibly getting out, that makes a world of difference. Michael: All right. We’ve covered a lot of ground this month. I think we’ll hold up there for the month. We will be updating the coffee market and some of the other things we’ve talked about here over the next month and on our bi-monthly videos and also on our blog, so you’ll want to stay posted to that. If you are interested in learning more about managed accounts with OptionSellers.com, you can request our free Discovery Pack at OptionSellers.com/Discovery. As far as new account waiting lists, we are well into September right now as far as the waiting list goes for openings, so if you’re interested in taking one of those remaining openings for September you can contact Rosemary at the main number to schedule a perspective client interview. Those will be taking place during the month of August. You can reach her at 800-346-1949. If you’re calling from outside the United States, you can call 813-472-5760. James, thank you for a very insightful commentary this month. James: As always, Michael, all 12 months of the year are interesting, but July and August certainly are one of our favorites. Michael: Excellent. Everyone, thanks for listening and we will be back here with our podcast again in 30 days. Thank you. James: Thank you very much.

united states new york amazon australia talk chinese green minnesota coffee brazil illinois wisconsin north record indiana iowa ending discovery starbucks midwest weather columbia nebraska chances brazilian markets cnbc south dakota radio show north dakota generally usda traders complete guide la ni citibank northern hemisphere southern hemisphere premiums dakotas td ameritrade roasters michael gross james michael southern brazil michael you michael yeah james it james you james yes thinkorswim james well michael okay michael all james thank option selling james exactly michael hello optionsellers

April Opportunities Crude Oil, Cotton Market for Option Sellers

Play Episode Listen Later Mar 31, 2017 26:48

Michael: Hello everyone. Welcome to the April edition of the OptionSellers.com Podcast. This podcast will be both video and audio podcast. This is our first video podcast. James, welcome to the podcast. James: Thank you, Michael. Very excited about doing both video and audio – get our mugs out there! Michael: I think first on the agenda this month is what we have going on in the stock market right now. Is this going to be the long awaited correction everybody’s been awaiting or is this just a little blip? What do you think? James: It’s interesting, Michael, the stock market has just been on a historic tear here ever since the election – and with good reason. If we have deregulation and we have a lot of pro-business ideas coming out of Washington along with a U.S. economy that’s doing fairly well right now, a lot of investors have been pouring into the stock market. We had the first shot across the bow, of course, with the healthcare issue being quite a bit of a swing and a miss for Mr. Trump this past week. A lot of investors right now are thinking, “Well, if we can’t get that passed maybe the deregulation and lower taxes and interest rate help may not be as much of a slam dunk as a lot of investors thought.” This could finally be the catalyst for the long-awaited 5-10% correction in the stock market. Everyone was absolutely factoring in the best-case scenario. Now, Washington D.C. quite isn’t as put together as people thought. The whole idea of a strong U.S. economy along with a very business-friendly administration, some of that’s being taken off the table right now. I wouldn’t be surprised that a lot of investors do take some chips off the table. Some of the largest investors in the world right now have thought about that and Goldman Sachs and large banks like that are talking about making their position smaller. That tells me maybe the long awaited correction probably in the 2nd quarter this year might not be such a big surprise after all. Michael: Yeah, I’ve noticed a lot of the news channels are still bullish, they’re still cheering it on, but you can’t underestimate that public sentiment. If it starts to go, everybody’s pricing in this big economic boom. If that doesn’t happen, you can’t underestimate what that can do to prices, as we’ve seen in commodities, as well. James: Absolutely. We start getting just a little more selling than buying. We keep buying the dips, buying the dips, buying the dips, and one of these times we’re going to cross a certain moving average that’s going to cause the computer to do some selling. Then all of a sudden, everyone’s racing for the door. The stock market’s not going to collapse. We’re not going to have an epic fall of 20-30%, but this long awaited correction that gets people to re-think their investment, that’s overdue. I think we could see that happen in maybe April or May. Michael: All right, well, lets talk about some ways people can get diversified, obviously what we specialize in. This month we’re going to talk about the cotton market. Some things are starting to take place there. It’s been on a pretty good bull market here for the last year or so. We’ve had lower supplies and cotton has just been gradually trending up. You and I have been talking about this over the last several weeks about we could be seeing a shift here, we think there’s some opportunities for selling premium. Talk a little bit about it. What do you see happening here? James: Generally, the ten commodities that we follow will have a spurt of buying from an importing nation and then will have a spurt of selling from producers that have an abundance of whatever the commodity is. What’s happened this past 12 months is we’ve seen Chinese imports have gone up dramatically over the 5-year average. That, of course, rallies the market. Cotton right now is at practically a 1-2 year highs. What’s so interesting, Michael, is that a lot of investors will hear that the Chinese consumption last year was up like it was and they’re going to pile in on this long position. I know we were talking a little while ago about the SPEC position in cotton. It’s at near all-time highs. It’s basically the herd driving into a market that sounds like it has bullish fundamentals, only to have the Chinese buying. Watch this- all of the sudden it will turn off the beginning of 2017. This timing coincides with plantings in the United States. They’re expected to be up some 10% this year. So, you have all this bullishness, you have all the speculators piling in. China is one of the greatest traders of commodities in the world. Obviously, they have the largest population and they need to feed them, clothe them, and provide energy. They seem to be some of the best traders, so they were buying cotton last year when cotton prices were low. Now, they’re at multi-year highs. Speculators pour in and now the U.S. farmer plants 10% more cotton than they did last year and now you watch the market turn back down. It’s a seasonal trade and it lines up with the fundamentals. Doing the opposite of what everyone else is doing right now in commodities has been quite a great trade over the last 12-24 months. Speculators race into the cotton market. All of the sudden, the fundamentals turn and all of the sudden you have them heading for the door probably this 2nd or 3rd quarter of this year, as well. Michael: Yeah, that’s an interesting point. You’re talking about prices going up on SPEC buying and demand. We were looking at the ending stocks for cotton and they are low by maybe historic standards but relatively over the last 4-5 years they are fairly high. I’m going to check my stat over here- I know I don’t want to get the figure wrong. Ending stocks for cotton this year at 4.5 million bales, that’s still the highest in 8 years. Now, what you’re talking about is you have farmers because prices are so high they are planting in 9-10% more cotton this year. We’ll know for sure here in our report at the end of the month. We’ll get planting intentions reports, but early estimates – if we’re planting 9-10% more cotton, plus we have that seasonal tendency for prices to start declining this time of year, those call premiums have really escalated up above the markets. You’re thinking this might be a good time to start picking some of those off? James: We do. It’s a great way to diversify a portfolio. Cotton right now is overpriced. The supplies worldwide are high enough to not cause any type of shortages over the next year or two. The Chinese buying is probably going to slow down and the United States is probably going to produce quite a bit more cotton than the last several years. It almost turns out to be a perfect seasonal play. We’ll wait and see if that’s the way it turns out. Michael: All right. Now, in our piece, we did write a piece on this earlier in the month, you can see it on the blog if you haven’t seen it yet, you were looking at the Dec 90 calls. Is that still a strike that you like right now? James: The Dec. 90 is like our dream call right now. We’re hoping that the market can edge up a little higher to reach that level. Selling cotton in the high 80’s is probably what we’re going to wind up doing. If we can walk into the 90 calls a little bit later in maybe April or May certainly we’d put our tuxedos on and jump into that trade. That one looks like a good one. Michael: That’s one we put out there for when we write our public articles. Obviously, when you and I are trading we’re doing this, often times a series of strikes, a series of months, sometimes even a series of strategies all in the same market for our clients. I think you kind of picked that one as a good example for people that may not be clients and are just reading this and seeing a typical type of strike we would look at. James: That’s how we would play it, both for our clients and anyone trading and taking advantage of short options or riding out there. That’s why I would steer them that way, yes. Michael: Obviously, for any of you listening to this that are interested in how we put these fundamentals together and select this type of trade, like in cotton, you’ll want to get a copy of our book, The Complete Guide to Option Selling: Third Edition. That is available on our website at www.optionsellers.com/book. You’ll get it at a better price there than you will at Amazon or your local bookstore. All right, so let’s move on and talk about one of your favorite markets, the crude oil market. We have been addressing this market over the last month or two, but we’ve come to a point now in crude oil where you think there’s some major fundamental shift going on and I think that’s presenting some pretty good opportunities for option writers. Do you want to give your overview of crude oil right now and what’s happening there? James: Michael, one of the markets that we follow most closely is because it has the most trading volume and open interest. We were earlier talking about speculative buying or selling and different commodities. Often, it’s based on headlines. We noticed that when OPEC announced production cuts earlier this year speculators raced in to the long side of crude oil. Headlines The Wall Street Journal: First OPEC Production Cuts in over a Dozen Years. Clearly, the market is going to rally, clearly it’s a great buy, it’s just a matter of how much money you’re going to make buying crude oil. That’s what speculators did. They accumulated the largest SPEC position in history right after the production cut announcement. What’s so interesting is that this herd mentality so often is wrong. Needing to peel back the onion just a little bit just prior to the production cuts, especially from OPEC, non-OPEC nations cut production as well, that’s not as important, with the exception of Russia, of course, which is the second largest producer in the world. The 3 months prior to the production cut announcement, OPEC ramped up levels of new supplies to the largest level ever. As a matter of fact, the production cut that was announced was basically equal to the increase in production the previous 30 days to 60 days just prior to the cut. Nobody hears about that. All people talk about is production cut from OPEC and the market’s going to go to the moon. Investors start buying calls and buying crude oil futures and crude oil companies, for those of you who are investing in stocks, at an all-time record pace. This past week, we’re now starting to count barrels and we’re looking for the supply cuts. Certainly, with all these production cuts by OPEC announced, we’re going to have smaller amounts of crude oil worldwide, right? Didn’t work out that way. Here in the United States, of course, the Permian Basin, the Dakotas, different parts of Oklahoma and Texas are ramping up oil production to all-time, all-time highs. The investors and speculators that push prices up to north of $60 a barrel for far-out contracts built in the greatest hedge that the people in Texas have ever believed that could absolutely happen. Texas production is approximately $16-$18 per barrel to pull it out of the ground. They were just allowed to hedge their production over the next 2-3 years at approximately $60 a barrel, a.k.a. printing money. So, the old adage of low prices curing low prices may not take place this year. Production in the United States is expected to make all-time highs at a time where OPEC is going to start probably becoming slightly fragile. OPEC production cuts, everyone is doing a fairly good job of following along with the cuts that they talked about and oil prices start to fall. OPEC nations then start to cheat and at that point we have a snowball effect. It’s probably too early for that to happen. June and July are very strong demand months here in the United States. We don’t expect to see prices really crater this summer, but this fall if we have a slight tick up in prices in June and July of this year then we’re going to be looking at call selling opportunities for December, January, February, March, the weakest time frames of the year, at the same time when supplies will probably be at their all-time greatest. We are watching with both eyes very closely for a small tick up in energy prices this June and July. Clearly, they’ve fallen off dramatically. We were talking about selling a crude oil when we did not believe production cuts to be so bullish, crude oil fell $7 shortly after that. I remember talking to clients and other people that are in the industry that don’t trade with us. I said, “Watch out! Don’t listen to this OPEC production business. It’s not bullish, the market’s going to likely fall.” We had a couple of colleagues that said, “James, why are you telling me this?” I said, “I’m just warning you because we think that the market’s going to fail here”, and he was basically saying, “Well, the whole world is bullish. We’re going to have less production.” It didn’t turn out that way. Oil fell some $6-$7 a barrel. We’re hoping for a slight up tick with strong demand for driving season this year in the United States. If we get that, we think call selling in crude oil could be good for 6-12 months out. Oil this fall and winter could be in the low 40’s, it could actually have a 3-handle on it, and we’re going to be taking advantage of that when that happens. Michael: Yeah, I just put together out summary. We sent our summary to CNBC this week on the oil market. Hopefully, they’ll want to have us on and talk about it, but if you’re listening, CNBC, we’re ready for you with our quarterly oil analysis. Feel free to give us a call. I know you, James, talking about the cuts, have not affected supply. In fact, right now, all-time record highs in the United States- 528 million barrels. That’s 27% over the 5-year average. So, I would think that still qualifies as a glut. Would you? James: Michael, that’s definitely a glut. If we have one more barrel in the world than we need, prices go down. We have just a dramatic over-supply in the United States. Ever since we’ve been counting barrels of oil in the United States, we have never had a higher supply than we do right now. At a time where production in the United States is now going to ramp up, it is a bearish scenario. Am I saying that oil is going to fall every day and it’s going to go down to zero? We’re not saying that, but as far as the investors that like the herd mentality, this June and July we’re probably going to have more ramblings out of OPEC. They’re going to say, “We’re going to extend the cuts. We’re happy with the way it’s working but we’re going to proceed to extend these cuts further.” We’ll probably get another pop from that on the bullish news, and that’s the one we’re going to use to probably lay out some calls out 6-12 months and I think that’s going to work out pretty well. Michael: For those of your listening that may not be that familiar with option selling, what James is really saying is we don’t need prices to fall, although we think that’s a distinct possibility, we just don’t need them to go skyrocketing up in this environment. With this type of supply we don’t think that’s likely, that’s why we go high above the market and sell calls. As long as the market doesn’t get there, those calls expire and investors keep the premium. Did you have your eye on any strikes you want to share right now or do you want to save that for another podcast? James: We’re going to be selling crude oils calls with a 7 on them, and I don’t mean 7 or 17, I mean 70. If they’re producing oil in Texas at 17, we’ll go short at 70. We’ll take our chances on that and I think it’ll turn out pretty well. Michael: All right. For those of you who want to read our full forecast and analysis of the crude oil market, along with some potential trades you can look at, that is coming up in our April newsletter. It’s going to be coming out within the next couple of days. Look for it in your mailbox. If you’re not a subscriber yet, you can subscribe at our website. If you come to our website and order anything you’ll be on our subscription list. We do have a special crude oil feature this month because this is the trade we’re going to be looking at now for the next several months. One thing about option selling is if you’re taking premium out of a market, you don’t just have to sell it once and take it, you can often keep mining premium into that market for months at a time. Am I right? James: That’s how we do it. Michael: Okay. In addition, in your upcoming April newsletter there’s also a special feature this month on some of the top mistakes high-net-worth investors make, particularly 1 percenters... people that are in that higher-net-worth strata, that even though we tend to be sophisticated investors, at the same time there are some blind spots there. We did a lot of research here, a lot of different reports we found, and I think you’re really going to be fascinated to see some of these things. A lot of them, James, you wouldn’t even think of as high-net-worth investors making these type of mistakes, and they do. We really put that in perspective and I think a lot of our readers will enjoy it. James: You know, money doesn’t come with instructions. So often, you hear about investors that are making their money in whatever line of work their business or company that they had, and when they go to invest on their own they don’t quite have the success. A lot of our investors, the clients of ours, made their fortunes being experts at what they do and hiring someone to do it for you is probably a pretty good idea. Michael: Well, the first hint is don’t keep it all in the stock market. I’m sure most of you probably know that. So, we’re going to move on to our lesson portion of the podcast this month. James, this month we’re going to talk about an aspect of risk management. We did a piece on some more advanced ways to manage risk this week on the blog and we got a lot of feedback and a lot of questions. Thank you, all you viewers, for that. One of the things and questions we got there was, “Well, that’s great for naked options, but what about if I’m doing a strangle? How do I manage my risk on a strangle? I’ve sold a put and I’ve sold a call on the same market- how are you managing risk on those?” I think that’s something we want to talk about and address some of our readers who maybe want to learn how we do that. James: One of our most attractive commodity options sale that I find when I’m scouring the 10 markets that we’re closely watching, and that is identifying fairly valued markets. Quite often, you will have CNBC or Bloomberg go to the pit and the gold market is down $20 or it’s up $20 and people are talking, “Oh, the gold market got hammered today. The gold market’s soaring today.” A $20 move in gold makes a headline. It makes a headline on T.V. and they go to the pits and they’re talking to the traders and what have you. A $20 move in gold doesn’t move the needle for the options that we sell. When we sell options on crude oil or coffee or gold, often they are 50-60% out-of-the-money. So, these 1-2% blimps in commodity prices for the underlining contract makes a lot of headlines, but as an option seller, whether it’s yourselves doing it for your own account or we’re doing it for you, it very rarely even moves the needle. When selling a put and a call in gold or silver or crude oil, often the distance between the put and the call is the same value as the underlining contract itself. In other words, gold is trading around $1,200. We have option sales where we strangle gold and the strangle is $1,000 wide. So, identifying fairly valued markets, gold happens to be one of them right now, we think it’s pretty close to fairly valued, the put and the call they babysit each other while you’re waiting is basically the best way I can look at it. For example, if you’re short a gold strangle, your call is $500 above the market, your put is $400 below the market, this one is offsetting the other one at the same time. So, in other words, if the gold market moves $20-$30, your call position might go against your slightly, but your put is now taking care of the differential between from where you put the initial position on. If you use the 200% rule, and we do that ourselves, it is a very, not necessarily strategic, but it’s a very easy management tool that you can use. If you have 12 positions on in the year and 2 of them double in price, do the math. That still can be a very, very great return and it does hold your risk parameters in check. If you are selling a strangle in gold, you might take in $600 on the call, $600 on the put, you have $1,200 worth of premium. Not only will a naked call or put often double, unless the fundamentals change, but that $1,200 in premium that you take in on a strangle, that will almost rarely, practically never, double in value. So, if you have a $1,200 premium in strangle, the $1,200 level for it to double to $1,400, rather $2,400, just happens so rarely. The strangle is our best approach to markets that we find that are fair valued. If you do have your put or your call pinching you just a little bit you’ll notice that the opposite direction option is doing extremely well for your account. Needless to say, you have to have risk control parameters when you first enter a position. You can put in a 100% rule on your short put or your short call. I would put 100% rule on the entire premium itself. It gives your position a great deal of time and room to work. The strangle, I think, is the very best option sale going. If you want to keep a very close reign on your put or your call you can do that. If you wind up stopping yourself out of a strangle on most commodities, in my opinion, you’re not selling enough time. A lot of investors and a lot of books talk about writing options, they talk about a 30 day, 60 day, 90 day option. If you’re getting stopped out of your short position, those are probably the options that you’re selling. I would go further out in time and in price. Commodity options you are paid to wait, and patience is the name of the game. If you’re able to put on a strangle and you’re able to wait, more times than not you’re going to have very good results. You’re not hitting homeruns selling a strangle that far out, but for those of your who want to win the game and are okay with hitting singles all year round I think that’s a great way to do it. I think our investors certainly know about that and our viewers could find that out for themselves if they wanted to. Michael: One way of looking at that, you’re talking about risking the whole premium of the strangle. In other words, you’re saying if you take in $1,200 you can risk up to $1,200 on either side. So, actually, you can be a little more aggressive on your risk management on both sides because you have that balancing affect on the opposite side. Correct? James: Exactly right. Michael: So, instead of risking your call to double value, you can almost risk it to triple value and still get away with it because you have some extra risk management with the strangle if you’re following that. James: The stay ability in a strangle, and that is the key to option selling, is being able to ride out the small blips in the market that change the premiums. Patience and the ability to wait is the key and a properly placed strangle will give practically anyone the ability to stay with that market. That is something that we find at our office for our clients that we do a great deal. The proof is in the pudding. The strangle is a great way to go. You need to identify a fair value market. If you’re able to do that, the strangle is going to be very fruitful. Michael: One of the things we talked about this week in our risk management lesson is the purpose of the risk management tactics often is just to slow the market down long enough to let them expire because time is always working in your favor. So, if you’re using a strategy like the strangle where you’re risking premium to a certain value, you can also incorporate things like a roll. You can use a roll in a strangle where you’re rolling up or if fundamentals change then maybe you just roll it into a one-sided trade instead of just a strangle. Getting a little more creative there, but all of those strategies that we talked about can also be applied to spread, even to a strangle, to get a little more advanced. James, when you’re talking about that, the 200% rule is a good basic rule that can be used either with naked or with a strangle you just described. James: Correct. For all the times you put a strangle on, there’s a chance your put or your call will double in value. As long as the fundamentals in that market didn’t change, feel free to roll down the put or roll up the call. 9 times out of 10 that will not double again and you will be collecting 75% of the premium that you originally sold for instead of 100%, but that’s a very great investment. Michael: Excellent. Well, I hope everyone’s enjoyed our first audio and video podcast this month. For those of you that are writing in asking questions and sending them, please keep those coming. We love to address those on our shows, such as this. For those of you interested in our accounts, unfortunately we are fully booked for April. We are working into our May availability now. We still have some availability for new accounts in May. If you’re interested in learning more about this, please call Rosemary at the office. It’s (800) 346-1949. She’s scheduling consultations, which will take place in April. So, if you’re interested in one of those, give her a call. She can get your scheduled. James, I appreciate your input this month. We’ll be back next month and we’ll update some of these trades and see what’s going on then. Thank you, James, for everything this month. James: My pleasure. Always happy to do this. Michael: For all of you out there, we will talk to you in 30 days. Thank you.

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The First 60 Days of 2017 – Target High Yields with these Top Seasonal Option Sales

Play Episode Listen Later Feb 16, 2017 25:54

Michael: Hello, everybody. Welcome to the January 2017 edition of the Option Seller Radio Show. This is Michael Gross of OptionSellers.com here with head trader, James Cordier, of OptionSellers.com. We’re starting off a new year here in the week of the Presidential Inauguration. James, it appears markets may be treading water here, kind of waiting to see how things play out after the Inauguration. What are your thoughts on the markets here as we start the new year? James: Well, Michael, welcome to 2017, as well. Really excited about the next 12 months, and we’ll see what the markets offer us as far as opportunities and looking at landscape as we go forward. The stock market certainly got a shot in the arm after the election, thinking that a Trump presidency is going to be very business friendly. The stock market certainly enjoyed that; however, over the last 3-4 weeks it is simply treading water going sideways, waiting for another idea. As far as “Will this actually help the economy? Will some of the Trump policies that are being tossed around actually be and do what we are hoping for the economy?”, the stock market is kind of going sideways waiting for a little bit more information. I think you’re right – right after the Inauguration I think people are going to get either the warm and fuzzies of the new president or possibly a little bit of a caution and then the stock market has some profit taking. The one thing that’s interesting right now is the put-call ration is the most bullish it has been in the stock market in years. Usually, that’s a bit of a caution flag for the market to have a correction. I guess we’ll find out in the next few weeks. Michael: Yeah, I saw Soros is one of the guys that took a beating on betting against the stock market with the Trump election. The big shooters aren’t always right. Of course, us here, we don’t trade the stock market but we do watch it closely, primarily because: one, a lot of our investors are in it and, two, because it can have an overall impact on a lot of other things going on in other markets. So, not a direct impact, but it’s something that we do keep an eye on. What we’re going to talk about here this month is obviously diversifying into commodities and we’re going to talk about a big advantage you have as a commodities investor. That big advantage is seasonal tendencies and commodities. January offers a plethora of seasonal tendencies that we can watch and take advantage of, and that’s what we’re going to talk about this month. James, why don’t we start out with some of our listeners that may not be familiar with seasonals. We do talk about them a lot, but maybe just start off by explaining exactly what a seasonal tendency is in a commodities market. James: Michael, that’s a really good point that you make about seasonals that do come up this time of year. For currency traders, they don’t know what a seasonality is. Trading silver, you probably don’t know what a seasonal is; however, trading corn and coffee and heating oil and crude oil is simply a propensity for a market to make a particular move during a particular time of the year based on supply and demand. New production that comes online certain times of the year, some of the biggest demand, certainly, for certain markets, comes at a particular time of the year. For example, heating oil and crude oil often starts getting large demand in the winter for heating oil and driving season for crude oil. The coffee market certainly gets a bump usually in December and January as demand for coffee, especially in the western hemisphere, does increase as temperatures cool. The propensity for the market to fall off starting March, April, and May, when temperatures in the United States and western Europe start to warm, people simply drink less coffee. That’s basically the ABC’s of seasonal trading. It seems incredibly simplistic but if you followed, and certainly we follow, the price of unleaded gasoline going into driving season, and the price of soybeans going into planting season, you become a true believer. Certainly, that is something how we like positioning portfolios using a portion of seasonality to diversify accounts, and January-February seem to be 2 months that offer the most trades like we’re describing. Michael: Now, we are going to talk about some of the more pronounced seasonal tendencies that do tend to happen in January and February, but, before we do that, we want to cover briefly here one of the mistakes people make, and maybe one of the misinterpretations people have about seasonal tendencies. A lot of people, when they first find seasonals, they look at them and it looks like they’ve found the Holy Grail of investing, the secret hand behind the markets. There are certain factions of truth to that, but the mistake most people make is they use them improperly. In other words, they may look at a seasonal chart and say, “Boy, this average looks like it falls every year on January 10th, and so I’ll sell it on January 10th and buy it back on January 31st because that’s when it looks like it goes up again.” What people don’t realize is that’s an average and trying to time that to the day is extremely difficult. A lot of people that try and do that end up losing and then they say, “Oh, well seasonals don’t work. They’re no good.” That is absolutely not the case; in fact, when you combine the strategy of selling options with a seasonal tendency, it can become a very powerful asset to your investment arsenal. James, can you maybe touch on or explain why that’s the case? James: Well, option selling, as the majority of our listeners know, is certainly putting odds in your favor. A lot of our clients and a lot of people that we speak to make it seem like you’re betting against the house. We are the ones selling the options, the people that come into the casino, if you will, are buying options. When you take the percentages of options expiring worthless and you combine that with seasonalities of when the market usually rallies or usually falls, you’re really putting the odds in your favor, but you have to keep your eyes open. Every single year you’re not going to have a seasonal tendency work the way it does on its 15 or 30 year average. You need to be aware of what the current conditions are in that particular market and see if it’s trading seasonally prior going into a sell or a buy for a particular market. Michael: One thing to mention there, too, is if you’re a futures trader or even some guys try to trade ETF’s with seasonals, which I do not recommend, but for futures traders, their timing has to be perfect. Option sellers, you don’t need perfect timing because you’re selling way above or way below the markets. So, if you miss the seasonal move that happens a couple weeks early or a couple weeks late, it doesn’t really make a big difference to you as an options seller, where if you’re a futures trader it can make a huge difference. So that’s one additional reason why combining option selling with seasonals can be such a powerful strategy. As far as the markets, I want to talk about one, James, you and I spoke about earlier that’s a little bit different this year. That’s the crude oil/unleaded gas market. We talked a lot in November about some possible big moves coming up in seasonal’s tendency in crude oil, the potential for prices to start moving higher, and we’ve had a little shift this year. Do you want to talk about that and what you’ve seen happening this year in the crude oil market seasonally? James: Michael, it’s interesting, crude oil and unleaded gas normally is extremely weak in the December-January time frame. Then, as you start approaching driving season, you normally see a large increase in price, albeit slow and steady, but it does go from its low in January to often its high in June and July. 2017 is certainly a different trade this year. With the first announced production cut by the largest world oil producers in the last dozen years, certainly it’s going to change the seasonality for this year. We were seeing crude oil pushing down into the low 40’s and then, lo and behold, Saudi Arabia and Russia and some of the other largest producers in the world decided we need to do something about balancing this market. They did come together and they did announce what seems to be production cuts that are sticking, to a certain extent, and the oil market, which normally rallies from January to June, made that entire rally the days and weeks after the announcement. So, like I was saying earlier as far as keeping your eyes open in reference to what’s happening on any particular year, 2017 is a perfect example of that. Michael: So, you think as far as a seasonal move goes, where the normal seasonal for crude or unleaded tends to start pulling prices up in January in anticipation of driving season, you think we’ve already seen the bulk of that move already? James: I really do. We will have stronger demand for products such as gasoline starting in March and April; however, we have oil pushing in the low-mid 50’s right now. A lot of the production cuts that apparently will take place at approximately 1 million barrels, it’s thought that those missing barrels can come back onto the market relatively soon. We’re expecting the seasonality this year of higher prices going into driving season muted quite a bit. Michael: So, in the near term, you’re not necessarily bearish prices, you’re just not as bullish as you normally would be, simply because the price has already moved up. What’s the strategy to trade it then? James: Well, the strategy is actually one of our favorites. The fact that we do have fewer barrels coming online from OPEC and non-OPEC nations should underpin the market. We should not see oil trade into the low 40’s, certainly not the high 30’s, going into driving season. That certainly is not going to happen, especially with the OPEC and non-OPEC production cuts. We would be really interested in selling puts in the low-mid 30’s for crude oil for later this year delivery. At the same time, the fact that the market has already done its seasonal rally and we expect the U.S. production to come online, we would not see oil go into the mid-upper 70’s. Practically ideal for the clients who follow along and the listeners that we hear today that know about what’s called a strangle, you would sell crude oil puts in the low 30’s and crude oil calls in the high 70’s. I think that is a really good opportunity as far as collecting premium on both sides of the market. There’s a lot of volatility and that’s when you get the luxury of being able to sell a strangle. I think, right now, the crude oil market is practically ideal for doing that right now. Michael: … and that’s what, close to a $40 strangle there? That’s a $40 window prices could move and both options still expire worthless? James: Well, that’s how we started out the conversation today with selling options far out-of-the-money. We’re strangling oil $40-$45 from the put to the call and we feel very confident that crude oil, which used to have large swings in the past, is not going to have a move like that, not in 2017. Oil is a great value in the mid 40’s. It’s quite a sale if it gets in the 60’s. Certainly, our strangle would be $10 above and below that. That’s the way we like to play it. Michael: All right. For those of you listening that want to learn more about seasonal tendencies, how they work, we did devote 2 full chapters to seasonals in The Complete Guide to Option Selling. If you do want to see some of our favorite there and some of the ones we recommend for individual investors you can find those in chapters 15 and 16. That’s in the new Third Edition. Of course, if you want to purchase a copy of that you can at www.optionsellers.com/book. You get it at a discount at Amazon or Barnes and Noble there. Let’s move on to talk about another seasonal tendency that does appear to be tracking closely this year, and that’s over in the grain markets. We have 2 markets there we’re watching very closely. Both the soybean and the wheat market have strong seasonal tendencies that tend to start in January. I’m going to talk about wheat here for just a second. As far as the tendency goes in wheat, wheat has a strong seasonal tendency to start declining in price in January. Unlike most of the grains, wheat is the only market that can grow in the winter. In fact, you may not know this, but, 75% of the wheat grown in the United States is winter wheat. Therefore, that gives it a different seasonal tendency than the other grains, from oats to corn to soybeans. Winter wheat sprouts in January, typically. Unlike the other commodities, it doesn’t have extreme heat to deal with. There are some weather factors, but typically once that wheat crop sprouts a lot of the anxiety comes out of the market and once that sprouts and it starts growing, a lot of traders will start selling wheat because the fear of the upcoming winter wheat crop tends to start to come out of the market. That’s why you often see wheat prices start to decline in winter and continue that weakness through spring. Obviously if your investor wants to take advantage of that, you may look at a call selling approach. We’ve taken that a step further and that involves a different market. That’s the soybean market, which has a different seasonal. James, you’re going to talk about soybeans here a little bit. James: Michael, that’s interesting. A lot of investors, whether they’re close to commodities or they simply keep one eye on them from time to time, would think that corn, wheat, and soybeans are always moving in the same direction. Soybeans have very different fundamentals and very different seasonality than the wheat market does. In the winter, January and February especially, demand for soybeans and soybean meal is at its greatest, as many U.S. producers and producers around the world are feeding livestock. Of course, that is when demand is the greatest for protein seed. At the same time, in South America, quite often you’ll have weather problems because it is grown in so many areas. Especially in Brazil and the surrounding southern countries of Brazil, they seem to be having, once again, some weather developments down there that are supporting prices. At the same time, the weather in the United States, for especially the Midwest, is always either too wet, too dry, too hot, or too cold. Sure enough, a weather premium starts getting built in the months of March, April, and May. For soybeans, January is usually quite a strong buy time as far as expecting prices to start moving up, just the opposite of the wheat. For those reasons, we like selling puts below the soybean market in the months of January and February. It’s almost a squeeze, if you will, by being short wheat and going long soybeans over the next 90-120 days. Certainly, that is something that we have followed closely in the past and, sure enough, looks like it’s setting up again for 2017. Michael: Yeah, we talk a lot about combining strategies to boost your odds, how the option strategies you can’t just view them in a vacuum when you’re trading them in a portfolio. You look at how one position offsets the other and a perfect example of that is one of the things we’ve talked about here. It’s called the Minnesota Squeeze. We’re not going to go into it here, but we are going to explain that in detail in your upcoming Option Seller Newsletter, which is slated to come out next week. We have a very special combined January/February seasonal issue and we are going to show you how you can combine these two seasonals to really boost your odds when it comes to getting those worthless expirations, selling the wheat into the growing season fade, and in buying the soybeans on the potential weather rallies in addition to winter being a high-demand season for soybeans. That will be in your upcoming special issue January/February newsletter. Look for that the week of January 23rd. In addition to that, in your upcoming newsletter, it is a special issue on seasonals so we’re going to talk in a little bit more detail in some things you can do to put these seasonal tendencies in your favor. It really is an advantage you have as a commodity options seller, as opposed to being in the stock market or bonds. It doesn’t really exist in any other asset class, so it’s something you can take advantage of in commodities. We’re also going to cover another subject that’s near and dear to our reader’s hearts and that’s staying properly diversified and how sometimes investor fear, even savvy high-net-worth investors, can let fear get in the way of getting properly diversified. There’s some good stuff in this month’s newsletter. I hope you enjoy it. James, before we go this month, let’s talk about one of your favorite markets, as we continue our coverage of big seasonal tendencies this month, that is the coffee market. We just published a special coffee article this week that is available on the blog at www.optionsellers.com/coffeejan. Let’s talk a little bit about coffee. We’ve got a strong seasonal tendency for weaker prices coming up here. Can you talk a little bit about that, James, and why that tends to occur? James: Michael, the coffee market looks like in 2017 it will be trading seasonally. Often, the winter time frame is when many of the producers in South America and Central America have to watch the weather quite closely. As long as those areas get ample rains, cherries then form on trees and, of course, those become green beans and later on roasted into the lovely mocha color that we all enjoy… most of us do each morning. Once the fear of the weather patterns in South America and Central America dissipate, and they usually do, that is normally short-lived and it looks like set-up is taking place again this year. At the same time, during the winter period is the strongest demand. So, we do have in western hemisphere areas the strongest and most consumption of coffee is in the winter and colder months. As we get into March, April, and May a lot of tendency does go to either soft drinks or flavored waters and I know that sounds kind of interesting to be talking about that, but when you multiply it by 300 million people in America, changing their drinks by just a slight amount really does make a large difference. Quite often in the winter, we have the most fear for any type of drought conditions in the coffee growing regions. That is now behind us. Coffee consumption in the United States will start to taper in February and March, and that is why we usually look to sell calls in coffee at the very beginning of each year when the seasonality and propensity seems to be setting up. 2017 looks like, yet, another year to be selling calls in this market. Coffee has been trading around $1.50 a pound on and off for the last quarter or two. The market did bump up here recently on what was expected to be a slightly smaller production in exports out of Vietnam. Then, earlier this week it was just announced that Vietnamese exports were up 25-30% from the previous year. Once again, knowing your fundamentals is really important. When you can combine that with the seasonalities and the odds of selling options, you can find out just by watching this for maybe 12 months why we do follow seasonalities and why it can combine with selling options to be really good for someone’s portfolio. Not every single time, like any other investment, but, on the averages, I like where we stand. Michael: Needless to say, as an option seller here in January/February, certainly no shortage of opportunities coming our way. If you’re a managed client, you have obviously seen the majority of these trades in your account thus far, and we certainly look forward to some more of those coming our way as we work through the first quarter. If you’re not yet an account, these are markets you can look at and maybe learn a little bit more how these trades work. We do have some availability for new account consultations in February. If you are interested in a managed account that is your first step. You can call Rosemary at our main office at 800-346-1949 to inquire about availability for those. If you’re one of our international listeners you can call at 813-472-5760 or you can also e-mail… that is office@optionseller.com. James, thank you so much for your insights this month. James: My pleasure, Michael. Always great chatting about what it is we do for our clients and our listeners. Beginning of this year looks like there might be some very good landscape and some very good opportunities. We’ll just have to wait and see. Michael: Well, perfect. Everybody, have a great month of option selling. It’s 2017- if you’re not diversified into alternative assets this is a great year to think about it. We wish you all a great month of option selling and we’ll talk to you next month.

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The 2 BIG Markets To Take Premium From Now

The Drama Teacher Podcast

Play Episode Listen Later Nov 23, 2016 28:40

Welcome to Option Seller Radio, the podcast for high net-worth option writers. Here, you’ll learn option selling strategies you can use right now in diversified commodities markets, such as crude oil, gold, coffee, and soybeans. So, listen in and start putting decades of knowledge from the OptionSellers.com team to work for you. To learn more about OptionSellers.com, and their managed portfolios for high net-worth investors, visit www.optionsellers.com. Michael: Hello everyone, this is Michael Gross at OptionSellers.com here with your November issue of OptionSellers.com podcast. This is a special Thanksgiving edition and, boy, the world has turned upside down since our last radio show. The title of this month’s show is Trump, the Fed, and 2 BIG Markets for Taking Premium Now. I’m here with James Cordier, head trader here at OptionSellers.com. James, welcome to this month’s radio show. James: Thank you, Michael. It’s always a pleasure and, boy, have things changed since we met last. Michael: Well, if you’re listening to this before or after you’ve had your turkey-day, we hope to bring you some good insights here for selling options and understanding the commodities markets over the next 30 days. As we all know, on November 8th Donald Trump won the presidency and that has certainly presented a list of pitfalls and opportunities for the markets. We’re going to touch on some of those today. Also, have big Fed announcement coming up in December that will have a big impact on the markets, and we are going to discuss those today. James, why don’t we start out by just you giving your general comments on the election, what you think this means for commodities markets. James: What’s interesting, Michael, the pollsters both in England for the Brexit and here in the United States for the presidential election really did not get it. They weren’t even close. Hillary Clinton had a 5% lead going into election night and we all know what happened there. So interesting was the initial response to Donald Trump apparently winning the election. First thing was to sell stocks with both hands and buy gold, with the idea that is just so much uncertainty and how can this gentleman out of nowhere come in and run the greatest and largest economy in the world and, lo and behold, everyone said, “You know, maybe he can. He’s a great businessman, he has been very successful, and he doesn’t mind borrowing money and building things.” Certainly, that’s something that could definitely propel the U.S. economy to levels that it hasn’t seen in quite some time. I think, personally, that both the economy and inflation, something we haven’t had grow at any marketable levels in a long time, is going to really open some eyeballs here the next 12-24 months. Michael: We also have the other big news on the horizon here is the Fed is expected to raise interest rates in December. That could also bring some changes to the market, potential opportunities. Do you have any thoughts on that at this point? James: Michael, the topic of discussion, I think, going forward will be U.S. growth no longer at 1%, no longer at 1.5%. We think it’s going to have a crooked number for years to come, in other words, 2%, 3%, and 4% growth. What the Federal Reserve does in order to rein in potential inflation, I think, is going to be headlines constantly with the Federal Reserve talking about raising interest rates to fight inflation, but, lo and behold, I think that’s something that the Federal Reserve has just been waiting so long for and I think we’ll, behind closed doors, do everything they can just to stoke it a little bit and let it run hot. Michael: James, that’s a point you’ve been making in a lot of our articles recently, and recently, also on CNBC here this past Friday, you had a pretty informative interview on the gold market. Your big theme and our big theme here at OptionSellers.com is that we see inflation picking up in 2017 for a variety of reasons, which you, by the way, did outline very well in our gold piece earlier this month. It is on the blog. As far as your outlook on gold, you had a pretty good interview here Friday where I thought you made your case on CNBC. What do you see happening there over the next 90-120 days? How do option sellers who are looking at that possibly take advantage of that? James: Well, Michael, with what could be a stronger economy in the United States, what will likely be slightly higher interest rates, of course, we’re going to have ¼ point rise here in December – that’s already said and done, it’s like a 99% chance of a rate rise in December. This is what’s been pressuring the gold and silver market here the last 2-3 weeks, was the idea of higher U.S. interest rates. Initially, that is causing a very strong U.S. dollar and when the dollar is strong a lot of investors will dump their gold holdings in order to get possibly into securities. The timing on that is going to be really interesting. When will investors start looking at a slightly higher interest rate with the idea that that’s not going to slow inflation? The timing on this is going to be a little bit tricky this year. Whether inflation starts coming back and the Federal Reserve does little to stop it, that might not be determined until January or February of 2017, but what will get put in place and I think what will be released coming up very soon is the idea of a much stronger U.S. economy, 2.5-3%, and I a lot of people on the inside are going to think the Federal Reserve is not going to stand in the way of letting it run hot. That will be the ignition for gold and silver to start rallying next year is that January, February, we’re not sure, but going forward right now put premium is ginormous for June, October, December of next year. We are really wringing our hands right now with exactly how to position going forward. Gold puts are extremely overpriced and we really like what we see for getting bullish on gold for next year. Michael: You had some great points and you bring up a good point about the put premium- it’s higher. There are a lot of people bearish right now on gold and, from my perspective, your perspective probably as well, it’s hard to see what they’re looking at. If you do see a growing economy next year, Wall Street Journal had a recent survey showing GDP is expected to jump to 2.2% next year, possibly higher in 2018. They’re looking at inflation jumping 2.2% in 2017, 2.4% in 2018, which may not sound like a lot but, considering it may end up this year about 1.8%, that’s fairly significant as far as the ripple effect it can have. I think you made that case pretty well. As far as people looking at gold and saying, “Should I buy the thing here? Is it underpriced”, what are some of these bears looking at? Why are they bearish gold right now? Why this big premium in the puts? James: Michael, all anyone can see right now is a strong U.S. dollar. I think the dollar this past week hit a 13-year high. There is much less uncertainty about health of banking and the banking system around the world right now. Over the last 24 months, there was Greece, Italy, and the Brexit and it was negative interest rates in Germany and just certainly things in the market that no one has considered before, so a lot of investors had the idea that, “maybe I should own some gold” with a brighter picture for the U.S. economy and other economies around the world right now. People feel less need to own gold right now. It hasn’t been a hedge against inflation for several years, and that, I think, is the canary in the coal mine where for the first time, I think, in 2017 we will finally be hedging against inflation – something we haven’t seen in practically a decade. People are selling gold right now because of a stronger U.S. dollar, inflation has not been a worry for several years, and that is what we think is about to change and why someone should look at selling puts and going long on gold. Michael: Of course, put selling strategy where you don’t really have to pick the bottom, you simply go far underneath the market, that’s a little bit of confusion that mainstream investors don’t get. I think, for instance, to go back to your CNBC interview, James, you’re talking about bullish influence for gold in 2017 and one of the commentators there, I believe it was Evan Newmark, was just an all-out bear. Didn’t like gold at all, told a story about how he bought gold index and it went down and he lost 80% and that the market’s no good. Just to dismiss it like that, he has probably never heard of selling options. When people think, “We think gold’s at a value, you should buy gold here”- we’re not necessarily saying that. We’re saying it’s at a level where you can go far underneath it, collect put premium, the longer-term fundamentals support price, and you can really afford to just wait it out and wait for prices to go up. That’s the whole concept of selling options. It’s the same approach you’re taking in the portfolios now, is that correct, James? James: It is, Michael. So often, its herd mentality that drives prices too high and too low. When gold is rallying, everyone seems to be jumping on board. You have gold bugs coming out of the woodwork, buying gold coins and buying bars that you see on TV all the time. Basically, all we’re doing right now is saying that the value of gold right now is at fair value. That’s without any inflation. The gold market is down from $1,900 all the way down to $1,200 now. We really see extremely strong values selling puts at $9.50 and $9.25 for several months out in 2017. We don’t have a crystal ball, we don’t know when the gold market’s about to start rallying on any given day; however, if we do have strong growth in 2017, if we still have a relative easy fed, the gold market is going to look extremely strong as inflation numbers start coming out. Does gold bottom right here at $1,210? We’re not exactly sure, but would we go long by selling strikes at $9.50 and $9.25? We absolutely would. We think that in the 2nd and 3rd quarter of next year, gold will likely be $50-$100 higher than where it is right now. Certainly, that would put these gold options that we’re referring to $300-$350 below the market at that level. Of course, the premiums would be basically cut into maybe 90% from where the current position from where they are right now. We think the timing’s pretty good on it. When does gold start rallying? We’re not exactly sure, but the premiums are extremely large right now because of the down drafts since after the election. Michael: All right, and of course the title of this podcast is 2 Big Markets. A lot of times we’re talking about, well, last month we talked about soft markets, markets like coffee, cocoa, or we’ll talk about grain market. When you talk about major markets, for instance, like gold and silver where there’s a lot of liquidity, there’s just tons and tons of open interest there, open contracts, a lot of participation there. This is where you can really get creative with a lot of your option selling, and we’re going to talk about second big market today, which is one of our favorites. James, I know it’s one of your seasonal favorites… the crude oil market. This is a big time of year for crude oil. Would you maybe want to explain to our listeners why that’s the case? James: Crude oil certainly is one of the largest commodities traded worldwide. Energy prices seem to do quite well in the western hemisphere in June and July, as driving season and demand is as its greatest and often a time when supplies are at their least. Going into the 4th quarter of each year, we have something called shoulder season where we’re no longer heating homes in the northeast and we’re certainly not driving as far as long vacations. This is truly the smallest demand season of the year going into December and January. This year, we’ve had oil trading around $40-$45 recently, we have some discussion from OPEC that they’re going to try and reduce production, but each year we want to go long crude oil in December and January for the June and July time frame. That appears to be setting up quite well. Demand is at its least in December and at its most in June. December is when you would sell puts below the June contract with the upcoming driving season. Normally, you can sell puts $15-$20 below the current value in December and January, and you normally see a $10-$15 rise into driving season. Once again, our favorite seasonal play in all of commodities is possibly taking place in the next 30 days going long crude oil for next spring and summer’s driving season. Michael: Very detailed piece included in the upcoming December newsletter on crude oil that really talks about the seasonal and flushes it out, gives you some background info to trade this writing premium on it, how to get the biggest premium out of this market. James, you make this point well… as far as the seasonal for people listening that may not be familiar with what seasonal tendencies are, seasonal tendencies and commodities are the tendency, not the guarantee, but the tendency that prices tend to move a different direction at a certain time of year. Crude oil, for instance, as refineries start ramping up gasoline production to meet summer driving needs, they start doing it in December and January, and that’s when they start using more crude oil. Demand at the wholesale level rises. That is often coincided with the corresponding rise in price. So, these are the type of things that we look at while we’re analyzing a commodity that they don’t talk about on the news. They want to talk about what’s in the headlines but they don’t talk about these kind of invisible hands that are really pushing supply and demand. When you’re looking at commodities, that’s the kind of thing we look at here- the real underlying forces that are moving price, not necessarily what’s in the headline. James, that lead up to driving season, it appears, from looking at a seasonal chart, that that strength lasts all the way into May or June. Is that how you’ve tended to play it? James: That is how we see it, Michael. Here in Florida, and we probably have similar prices across the nation right now, we’ve seen gasoline prices dip below $2.00. Once again, you’re looking at gasoline at $1.90-$1.95 per gallon. Next May, June, and July you’re going to see gasoline around $2.50, $2.60, $2.70. I know that sounds like really making a simplistic argument to going long crude oil in December for the June and July timeframe, but it is as simple as that. The idea that prices are near their low around the holidays because demand is at its least. It’s not your imagination. Michael: As we discussed before, that is the feature piece in your December newsletter. You’ll see the seasonal chart we talked about. Also, one final thing to bring up about seasonals that we are going to talk about in this piece is these seasonal price moves, while they’re not guaranteed, past performance is not indicative of future results, of course, they tend to occur regardless of where the absolute supply of the commodity is… or the demand or the absolute price. They tend to operate independently of that. For instance, this year, gasoline stocks tend to dwindle. They hit a high in the spring and they tend to just fall off right into December. Even though gasoline stocks are higher than they typically are this year, they have followed that exact pattern straight down. This time of year they start to build them again. We have no reason to believe they won’t start building them again this year, and that’s typically what can cause that seasonal move. Going onto the December newsletter for those of you expecting it, you should look for that around December 1st or 2nd if you are on our newsletter mailing list. In addition to the feature oil piece, James, we put together a great piece this month called How to Make Your Portfolio Great Again. Obviously, a little play on the election there, but some really good pieces of advice in there you gave, especially for the upcoming year. I think anyone that’s interested in building a portfolio will gain something from that. Also, you’ll find a nice piece in this month’s letter about using premium ladders, something we haven’t talked a whole lot about on the show, and something we probably should. It is included in the book, The Complete Guide to Option Selling. It really gives you a blueprint for building a consistent income stream, if that’s what you’re looking to get out of this type of investing. James, lets move on to our trading lesson of the month now. We’re going to talk about a strategy that I know is one of your personal favorites. It’s one that we employ often in our portfolios. It’s the strategy of writing covered options. A lot of people that trade stocks think that means owning the stock and selling the option, but that’s not necessarily how you approach it. Lets talk a little bit about writing covered options and commodities and how you like to go about doing that. James: Michael, during times of low volatility, we don’t always have the luxury of doing a credit-ratio spread, in other words, a one-by-three, which is outlined in The Complete Guide to Option Selling chapter 10. Basically, what we’re doing during times of high volatility, something we just received now after the election, is the luxury of selling a ratio spread. In other words, for example, using our crude oil scenario…. We’re looking to sell the $30 crude oil puts. In order to babysit that position while we’re holding onto it we would buy 1 possibly $33 put. So, in other words, what we’re doing is we’re taking in a great deal of money selling the puts and we’re going to buy 1 contract to protect it while we’re holding it for 30-60 days to make sure that trade is exactly the way we though it would be. What it basically does is it controls the risk on your position and as you no longer need the insurance of buying that option, we can sell it off. In other words, we are taking in anywhere from $600-$700 per contract on our short puts. We’ll spend a little bit of money to hold that position as far as insurance using a long put option. It is basically, in our opinion, the very best way to take in premiums selling options and having a controlled risk parameter while you’re doing it. Michael: James, a lot of people when we talk about volatility and increasing volatility, mainstream investors that don’t sell options tend to run from volatility and they think, “Oh, I better get out of the market.” What they don’t understand and what option sellers do understand is that can be the time to really make hay as an option seller because it opens up these types of strategies. When volatility increases, that makes the premiums bigger. That means you can actually put on spreads like this and you can actually get a higher probability trade that goes a long way toward smoothing out the equity curve. You can get in a not only higher quality trade, but sometimes a, for lack of a better word, safer trade than you would otherwise. Would you agree with that statement? James: You know, volatility is certainly the low-hanging fruit for what we do. Any time we have the luxury of selling puts or calls 50-60% out-of-the-money in an area that we’re able to buy a long option to protect that position for just a short period of time, that is just the most low-hanging fruit landscape that we can ask for and we just received that since the election. Michael: If you’re listening to this discussion, and James and I have had this conversation in private over the last couple of weeks in regard to spreading the markets, and it has been a little bit more difficult to do in 2016. We’ve gone more to writing naked, which is certainly a viable strategy, certainly a good strategy to take premium out of the market, but when you can spread the markets when you get this type of volatility like we just got it opens up a whole new ball game for selling premium. We think that’s open now, we do think 2017 is going to be a much friendlier year to spreading options and certainly looking forward to that. James, I think one final point to make on this topic is you and I both know we get a lot of feedback from people that read our newsletter, maybe see us on TV, where we’ll write an article about something and recommend a possible trade – here’s a way you can take advantage of this – and there’s people out there that aren’t our clients that look at that and may take the trade. They go trade it themselves, and there’s certainly nothing wrong with that, but a lot of those people might not understand is that when we’re trading these markets we are trading them as part of an overall portfolio, as part of an overall strategy and not trading them in a vacuum, like I think some people take and trade on their own. So, when you put a portfolio together, you may be using a combination of different strategies, different strikes, different months, all designed to balance each other. I think that’s one thing that people just take a trade here and there don’t really understand. Would you agree with that? James: A balanced portfolio is certainly the key to success for any portfolio, whether it’s in stocks, or whether it’s real estate, or whether it’s selling options and commodities. We simply will have a blended cocktail almost, if you will, of our favorite positions that we see. Sometimes, it is a naked short position in coffee, sometimes it’s going long crude oil for the driving season, other times we see extremely large premiums on both the put and call side and in that case we would strangle the market. So, we utilize probably 4 or 5 different strategies and approaches to selling options on commodities and using a blending of all 4 or 5 is usually what a portfolio looks like. I know that’s what is going to be achieved here in the last part of 2016 and the beginning of 2017. Right now, premiums are extremely large and it gives us the ability to blend, what we think, is a very balanced portfolio using different strategies in applying short options. We’re really excited about 2017 and making exactly portfolios look just like that. Michael: All right, well I think that’s a pretty good analysis of spreading options and the strategy of the ratio-credit spread. As James mentioned, if you want to read more about that we have a whole chapter about it in our book, The Complete Guide to Option Selling: Third Edition. In closing, just a few announcements. As you may know or find out here in the newsletter, we unfortunately have no new accounts left available during 2016. All of our accounts are booked. The good news is, if you’re hoping to take advantage of some of these strategies we talked about in the gold or crude oil market, these should spill into January time frame. Would you agree with that, James? James: Especially what’s happening right now in gold and silver, it looks like an opportunity that even our listeners can take advantage of in January. Of course, if the oil market stays relatively low going into the new year, that is something we would certainly encourage our listeners to take advantage of. We only trade energies twice a year and one of those two times is coming up in the next 30 days. I would definitely encourage people to take a look at that. Michael: So, if you hear this and you say, “Aw, well I can’t really open the account” these things aren’t here and then they’re gone. They’re opportunities that could probably be available in January. We do have a few openings left in January if you’re looking to possibly have an account then. Consultations for those openings are still being scheduled in December. If you are interested in reserving one of those consultations, they will be taking place before the 15th of the month in December. So, if you’re interested in one of those, give Rosemary a call at our main number… 800-346-1949 to reserve one of those remaining openings. We wish everybody here a very happy Thanksgiving and, James, thanks for your insights this month. James: My pleasure, Michael. I hope everyone listening has a happy Thanksgiving. Very interesting times we’re going into. Sometimes, people feel that it’s a slow portion to the season coming up, but actually we find it quite exciting as investors are taking advantage of options and we’re going to take the other side. Michael: We will be back with you for a special New Years edition of the Option Seller Radio Show. Until then, everybody have a happy Thanksgiving, happy holidays, and a great month of option selling. To learn more about OptionSellers.com and their managed portfolios for high net-worth investors, visit www.optionsellers.com.

united states tv thanksgiving donald trump england energy germany gold italy wall street journal new years greece brexit markets fed hillary clinton cnbc gdp federal reserve opec complete guide aw crude consultations michael gross michael james james michael michaelas michael you michael well james you michael so james well michael all james thank option selling michael hello optionsellers james cordier

Drama Teachers: Theatre is Community

Play Episode Listen Later Sep 6, 2016

Episode 165: Drama Teachers: Theatre is community. Michael Wehrli thought he was going to be an actor. Then he thought he would be a director. And finally found a love for teaching and educational theatre - Theatre is process. Theatre is collaboration. Theatre is community building. There is nothing better than the ability to give somebody a community and the ability to provide tools for a student to build their own community. As an example Michael talks about creating a show in which students are not along for the ride in putting on a play, they are active participants in the process. Show Notes Theater Company - www.newmoonproductions.org Personal – www.michaelwehrli.com We Open Tomorrow Night Episode Transcript Welcome to TFP – The Theatrefolk Podcast – the place to be for Drama teachers, Drama students, and Theatre educators everywhere. I'm Lindsay Price, resident playwright for Theatrefolk. Hello. Hello! I hope you're well. Thanks for listening! This is Episode 165. You can find any links to this episode in the show notes which are at Theatrefolk.com/episode165. All right, my friends. Today, today, we're going to talk about… I was going to say favorite buzzword. But then, when I formed the word “buzzword” in my head, I'm like, “Well, that's not my buzzword,” because I think “buzzword” and I think negative marketing connotation and that's not what I mean at all because buzzwords are slick. I think we can share with one another that I am not a slick person unless there is an oil spill in which case I would be the one who would slick into it. Of course, right? My world is filled with all that kind of slick. I'm talking about a word that I like to hang my hat on, that I like to use, that when I think of this word, the images that come to my mind give me all the warm feels. I think it's just wonderful and I really think it's important to use in an educational realm – an educational theatre realm – and that word is “community.” I love the title of this particular podcast. “Theatre is Community.” I love thinking of a production, of a drama club, of a drama class as a community. Our guest today, Michael Wehrli, also loves the word community. When he creates work with students, that's his keyword or hat-hanging word or his word of the day. You know, the brain goes in weird places. Does Sesame Street still do a word of the day or was it a letter of the day? Oh, you know, maybe I'm just too old to remember the structure of Sesame Street. Let's go with that one. Too old! Anyway, podcast and community, let's get to it! LINDSAY: All right, I am talking to Michael Wehrli. Hello, Michael! MICHAEL: Hello, Lindsay! LINDSAY: How's it going? MICHAEL: All is well. All is well. LINDSAY: Excellent! Tell everybody where in the world you are. MICHAEL: Portland, Oregon! LINDSAY: I love Portland, Oregon. Organ and orligan. MICHAEL: Or again. LINDSAY: Or when the tongue just… Don't you love it when the tongue gets tripped up? My favorite is I'm a real pro at taking two words in my head and then smashing them together to make something. MICHAEL: Lovely! I do the same thing and they come out. LINDSAY: Awesome! So, now that we've established all the things that we do wrong with our pronunciations, let's start over again. So, Michael, you have a lot of hats. MICHAEL: I do, indeed. My theatre company is twenty years old. What we specialize in is bringing programs to organizations and schools and community centers and that's what we do. There are a couple of schools that I've been personally working at for a long time but I am very fortunate in my career now that I, as a teacher, get to pick and choose places that I want to work at and then just hire teachers for all the other things that New Moon Productions does. LINDSAY: Yeah, and we know you because you have written a lovely play – We Open Tomorrow Night?! MICHAEL: Oh, thank you.

community personal drama oregon theater portland teachers sesame street organ michael oh lindsay price michael all michael hello

Election Special: How will the Election Effect Commodities and Option Prices?

Play Episode Listen Later Jul 21, 2016 33:04

Michael: Hello, everyone. This is Michael Gross of OptionSellers.com, here with head trader of OptionSellers.com, James Cordier. We’re bringing you your monthly Option Sellers Radio Show. This is for the month of July. Today, we’re going to talk about quite a few things. I want to start off with the gold market, because, James, you were featured on CNBC this month talking about gold, taking a little bit less than bullish view on that. Is that still your view on the gold market right now? James: Well, Michael, as you know, everyone’s bullish gold simply because of 0% interest rates and negative interest rates around the world. The last time that quantitative easing was introduced in the United States, that’s what raised gold from $1,100 up to $1,900. Now, a lot of investors are thinking basically along the same lines. Quantitative easing was supposed to create inflation. Several years ago in the United States, when we went to QE, it didn’t happen. Now, I believe investors are falling maybe into the same trap, thinking inflation’s on the way. Because of negative interest rates, it may not play out that way. As a matter of fact, lower prices for commodities because of a weak global economy, we think, is more likely. Michael: That’s counter to what a lot of people feel right now because of times of anxiety, we have terrorist attacks again in Paris this month, seems to be a lot of turmoil in the world right now that’s bringing a lot of investor interest into gold. You seem to feel that the inflation argument probably will be what dictates the direction here over the longer term. Is that correct? James: Michael, eventually it always does. Quite honestly, inflation is the catalyst for gold and silver to go higher. If we have deflation, we just don’t see how it can produce gold prices of $1,600, $1,700, $1,800 an ounce, which a lot of investors are looking forward to. But the fact of the matter is, gold did rally to $1,800 and $1,900 an ounce several years ago. Commodity prices were raging, soybeans were at multi-decade highs, so was copper, so was crude oil, so were many of the foods. We are going into a very weak economic/global state as far as demand for commodities. We have overproduction of everything from steel, to zinc, to iron ore, to copper, and silver. We just don’t see the inflation scenario taking place. Is gold good for hiding out when there are situations going on around the world? I guess it is; however, inflation eventually dictates the price, and we’re seeing probably deflation at the end of this year. Michael: Well James, you make some good points, and maybe they’re listening to you because since your appearance on CNBC at the beginning of July, gold has had a pretty good retracement down. I also noticed, and this is something that we mentioned in the article that you did last week, that we have a very big speculative long position in gold futures. It’s on the record that with 50,000 contracts it’s pretty heavy, so oftentimes when you have that heavy speculative yet small speculators pouring into the market, they’re heavy along the market and you have commercials getting short. Sometimes that can be an indication of a trend change. James: Michael, we think this is one of the most crowded trades ever. Just about practically everyone who’s a gold bug is double down on getting long gold. We have had a decent rally. It rallied nearly $100 an ounce. We’ve come back about $50 real rapidly over the last 2 weeks or so. Basically, the U.S. economy is doing okay. We’re not looking at negative interest rates anytime soon here. We think that the smart money, who probably was buying gold around $1,100 and $1,200, probably feels that they just have too much company right now. We see gold probably retracing into the $1,200’s over the next quarter or so. We think gold is a great market to trade. We would not be stuffing it under our mattresses… not at this price, certainly with commodities headed lower, we think gold and silver are going to probably be sold off slightly as we go to the end of the year. Michael: Now, that brings up a good point, James, and I know you’ve made this point before, as well. When you’re talking about gold prices, or writing about it, people have the viewpoint of, “Well, what is it going to do? Is it going to go up? Is it going to go down? Where do I need to buy it? Should I buy it now?” Obviously, first of all, our listeners know that’s not really how we’re trading here or how you’re supposed to. What you can’t say on CNBC is “Look, I don’t know if this is the top, but we’ll see it going through the roof and you want to take advantage of selling some of those high option premiums.” Do you have any you’re looking at now or how would you go about trading that market? James: Michael, we like talking about volatility and low-hanging fruit at the same time. That just took place in gold and silver the last 2 or 3 weeks. Gold is probably fair valued around $1,300, and silver is probably fair valued around $20. The gold bugs and silver bugs just came out in full force over the last 2 weeks. Silver bugs buying $40 calls for silver out several months in time, buying $1,900 and $2,000 gold calls several months out in time. We just feel that the likelihood of that happening is so minute. It simply isn’t going to happen, in our opinion. Gold production is doing quite well, as a matter of fact. A lot of investors are familiar with the fact of oil production has gotten better and more productive with fracking. There’s a new technology in the gold production. It’s similar to oil fracking except it’s in gold production. There is no shortage of gold, and as we see investor appeal go towards other markets and realize that buying gold of $1,350 and $1,375, they’re buying the top price in the last 2 ½ years and that might be a good place to be taking profits. We think that selling calls, you know, $1,900 and $2,000 in the gold market right now is going to be ideal. We think that silver and gold are probably going to be around 10-20% cheaper than where it is right now. That’s probably the best sale on the market right now is selling silver calls at 40 and gold calls at $2,000. We think that’s probably the best way to find yield anywhere right now. Michael: Yeah, and I love that strategy, James, and I know it’s one you and I have talked about. You get so much investor interest and you get media interest and it kind of feeds on itself. That’s what brings us speculators in to start buying those deep out-of-the-money strikes. Targeting them is what you’re talking about now. A lot of investors probably aren’t aware that there are strikes available that far out of the money when you’re trading futures, and I’m sure a lot of them appreciate you pointing that out just now. Speaking of the anxiety, a lot of anxiety now coming about the election season. A big election coming up and the question I get a lot when I’m consulting with investors, and I’m sure you do too, is “How is the election going to affect commodities? How can it affect the price of my selling option portfolio?” How would you answer that question? James: Every time we have an election, all of the smartest minds in the world trying to figure out if that is going to be bullish or bearish for the stock market. Is it going create inflation if the democrat or republican wins? This has been going on for the last 200 years in the United States. We feel what it does is it provides opportunity because it’s uncertainty. Investors will buy puts who think the market is going to fall, they’ll buy calls at extraordinary levels that think it might be bullish, and we never use the terminology at the end of the day because let’s say at the end of the year from now on. That does not change the supply and demand of raw commodities. It changes it so little that going into an election, when there’s a type of fear on the upside or downside of a particular market, you want to sell that going into an election, because when the dust settles several days later, we’re right back to supply and demand, and that never changes with an election. We don’t see that happening in 2016 either. Michael: Yeah, that’s a great point. You get in an election year, especially right around the election, and maybe a couple days after you get sometimes a reaction in the stock market, and maybe even in some commodities, but the fact of the matter is, at the end of the day, no matter who gets elected, people are still going to eat their Corn Flakes, they’re still going to put gas in their car, and they’re still going to want their cup of coffee in the morning. The supply and demand cycle goes on, and that’s really how it affects the commodity portfolio. In the longer term, it probably won’t have that big of an impact. Speaking of coffee, you have a nice feature in the newsletter coming up this month that you put together on the coffee market. That’s kind of an example as where you get a news story or something pushing up prices against the fundamental. Can you talk a little bit about that? Just maybe give our listeners a preview of what’s coming up in that piece? James: Michael, what’s happening in coffee in 2016 is so similar to what has happened over the last 10 or 15 years. We have several fronts right now. We have dry conditions in some of the growing regions in South America. We have free season in Brazil, which historically was a big driver to higher prices. Of course, we have a lot of investors thinking that coffee consumption has increased dramatically. These are 3 things that have pushed coffee up recently. Coffee was trading around $1.30-$1.35 a pound. It has rallied up to $1.45-$1.50 a pound recently. Historically speaking, coffee rallies in June and July based on the fact that it is free season in Brazil. In all actuality, come September, October, November, Brazil is picking beans and Brazil, like all other nations, need to turn their commodities into cash. We see very large sales happening in September and October of this year. We see that the price of coffee will likely be around $1.30 to $1.35 at harvest time and we are very much salivating over selling calls at the $2.60, $2.70, and $2.80 level. We think that coffee will be half that price this fall, and that I think is probably one of the best examples of low-hanging fruit here in the month of July. Michael: So, it’s high right now, you think it’s fundamentally over-valued, if that’s a fair statement. You made some good points there, but is any of that based on where we are with supply right now? I know Arabica production hitting a record this year in Brazil- 43.9 million bags. Is that already priced in or is that yet to be priced in? James: The Arabica production in Brazil this year will be a record. The Robusta production in some of the northern regions of Brazil is down this year. It’s down about 2 or 3 million bags. However, there is no shortage of coffee by any means. We did have difficult weather because of El Niño this past year. La Niña is now taking place and we think that is going to return a lot of the precipitation to areas in Columbia, Brazil, Honduras, and Vietnam. That will help production in the upcoming year. Supply is worldwide; it’s practically a glut. Here in the United States, they call something known as green coffee stocks. That is counted and announced every month. In June 2016, coffee supplies hit a 13-year high here in the United States, 6.2 million bags, and no shortage of coffee in the United States. We’re the largest consumer, and as long as there’s a lot of coffee around the consumption country of the United States, we don’t see prices getting any higher than a weather scare, which is basically what we’ve had here recently. We think this is going to be a short-lived rally. Supplies are burdensome and demand is about the same, believe it or not. Michael: So, in short, this is almost like the ideal market we talk about in our book where you have a fundamental situation. The market, for whatever reason, rallies against that fundamental, it gets overvalued, the call options get overvalued, and we don’t necessarily now where that top is going to be, but when you know it’s overvalued you know it’s going to be there somewhere. When there’s options so far out-of-the-money, that’s a time you start cashing in on, that’s the time you start collecting premium. James: Michael, what we’ve noticed last 12 months is that any time a commodity rallies on headline news or slight weather concerns in different parts of the world, especially in producing nations, you have investors chasing yield. It happens in silver, it happened in soybeans, it has happened in coffee recently. When you have negative interest rates around the world it sets up opportunity, because what winds up happening is investors will end up buying commodities above and beyond their fair value, they come down to their fair value after the frenzy ends, and during that time there’s a crescendo, and that’s when you sell calls on commodities 30, 40, 50% above the market. In some cases, like in silver and coffee right now, you can sell calls 100% over the value of the market. That is just ideal for option selling in our office. Michael: Yeah, you made a point there. I want to go back to because I want to segway into talking about the upcoming newsletter this month. The front-page article we were talking there a little bit about modern asset allocation because it’s becoming kind of a hot topic in the media right now – is 60/40 – 60% stock, 40% bond, that’s what everybody is supposed to do. That’ll make you healthy, wealthy, and wise into retirement. Given the way the economics of investments are right now, you have negative interest rates, a lot of people worried about stocks, alternatives are about to get bigger. In fact, I don’t know if you’ve seen it, but there’s an ad now on TV, I believe it’s for Invesco, that they are making that statement: “60/40 is dead. The new allocation is 50/30/20, with 20% going to alternative investments.” Do you have a viewpoint on that or what type of asset do you favor? James: You know, that asset mix is becoming more and more popular. Reading the Wall Street Journal today, they were talking about CalPERS, of course the largest investment fund in the world. They made .7% and their fiscal year ending in June there is no question that investment funds, CalPERS, and everyone down to just someone investing their $1 million account of their own are looking for return. Simply put, the stock market is going to go up and down 5% at the end of the year, it might be down 1%, we’re not sure, that’s not the game we try and play. Selling options on commodities is just a great way to diversify in our opinion. It allows investors to take advantage of bull and bear markets, the economy gets weaker, it gets stronger, and it just continues to be uncertain. That’s ideal for what we do. A 20% allocation of a portfolio into diversification, if you will, into, for example, alternative investments like what we do, I think that’s about right. I know a lot of the investors that I speak to are probably around 15-20% and I think they’re happy that they are. Michael: James, I have kind of a personal story to share here. My mother came to me the other day and she wanted me to go with her to her financial advisor to meet with them. I said, “Why?” She said, “Well, I used to make money and now I don’t make any money.” It hasn’t grown, it doesn’t go anywhere, and she’s concerned she is in the wrong stuff. I said that I’d be glad to do that. I took a look at things and they have here in about 70% bonds, which may or may not be right for a retiree, and we’re certainly going to discuss that. I had to explain to her, “You’re in this bond market that maybe used to pay you yields, but it’s not paying any yields anymore, so that’s why you’re not getting money from it. I think that there is probably a lot of people in that mindset of, “Why isn’t there money coming out of this anymore?” It’s because of the state of where interest rates are right now. James: Absolutely. Central banks all around the world are doing everything they can to try and increase investment and how they do that is they punish savers. They punish people who wanted to be conservative in the past, and that’s a perfect example. 70% in bonds, getting absolutely zero return and it is just not right. Why in the world savers and people who do things as they were always taught, work hard, save your money, get a fair interest on it. Why in the world do central banks around the world force you to invest in a fashion that you normally wouldn’t do is just what has taken place recently. That is what is basically changing the real value of assets. The stock market this past week has gone up to all-time highs and what is the global economy? It’s awful. Why do you think interest rates in Germany are negative right now? Because the economy is doing good? No. They are forcing investors to take on more risk than they normally would. It is creating opportunities and everywhere from commodities to stocks, a lot of investors are fearful of the stock market right now. It’s going up right now because it has a FED put under it. In other words, the Federal Reserve and central banks around the world are going to continue pumping money into the system, punishing savers, and making people invest, and that’s really a scary scenario for sometime down the line. When the stock market bubble blows, who knows, but I can’t imagine that there’s going to be a chair for everyone when the music goes off. I don’t think I’d want to be long stocks on that day. We don’t know what the stock market’s going to do the next 12 months, but a lot of the investors I speak to right now are getting a little bit fearful of it. When the stock market makes all-time highs on bearish news, you really got to think twice about what you’re doing. Michael: Yeah, I don’t know about you, but the whole thing is starting to feel like a house of cards to me. I did a little research this weekend on that figure we were talking about, the asset allocation. There was a survey, there was a number of different big banks on here, they all add up different opinions, there’s no real consensus. They interviewed Barclay’s, Goldman’s, you know, a bunch of the larger organizations, and there is quotes there anywhere from 5%-45% of your total assets and alternatives now. I’m imagining some of those are starting to skew upwards, given the current state of affairs. We’re going to be talking about that a lot more in this month’s newsletter. The Option Sellers Newsletter for August should be in your mailbox, or at least your e-mail box, by August 1st. You should expect your hard copy probably a couple days after that. James, not to totally give away the newsletter, but there’s also a discussion in this month’s newsletter about option selling as an alternative investment, but it’s a type of account that doesn’t really… it acts like a business more than an investment. What we mean by that is a lot of people think that an investment, you buy something and hope it goes up, where a business, you get paid to sell something. If you’re explaining that to someone who doesn’t know how to sell options, it’s probably a better way to explain it. Is that how you would explain it to somebody that doesn’t how to sell options? James: Michael, it’s interesting, so often we’ll have investors who are really astute. They’re very intelligent, they’ve been trained in the stock market, and they understand economics 101 all the way to 1,001. But, when it comes to explaining option premium selling to them for the first time, it is a complete mystery. It is so much like owning an insurance company. It’s like running a business. Basically, you’re selling to people buying. 80% of the time these options expire worthless. The insurance company probably has even a better ratio than that, but you’re basically running a business. As opposed to an asset, like Apple stock or gold, and hoping that it rallies, you’re basically running a business by selling insurance premiums to whether investors are familiar with the price of calls or puts that they should be buying or not. The fact of the matter is, we’re basically running this investment more like an insurance company. It’s been that way for the last several years and, with the uncertainty abound right now, it feels like it’s going to continue over the next 2-3 years, at least, until a lot of the uncertainty around the world gets unsettled. Premiums are much too high for the underlining value of commodities. It is a lot like running an insurance company and, as long as option buyers continue, we’ll continue selling them. It is a whole lot like taking in premiums. Every once in a while you have to pay them out, but for the most part, it’s a good place to be. It’s almost like being in the house in Las Vegas or an insurance company, depending on which scenario you want to look at. It has been interesting and it seems to be getting better and better. Michael: Buffet says insurance is the world’s most profitable business. I think that’s a pretty good analogy. We will be covering that a lot more in the newsletter. You can look for that, again, on August 1st. James, let’s transition here and do our lesson for the month. There’s a good thing I want to bring up because we ran a series of blog entries this month entitled 7 Ways to Get Higher Premiums. It was, as you know, we discussed different ways you can get higher option premiums. It doesn’t necessarily say that we recommend all of them or we use all of them, but we talked about 7 different ways. I know you have your favorites and I thought maybe you could talk about some of the ways or some of the methods you use when you’re managing portfolios. How do you or what do you look for to target higher premiums? James: Michael, it’s interesting. When selling options, there are many different ways described as to how much time to sell, how far out-of-the-money, what type of premiums to look for. One really easy secret that I can share with our listeners today, is that if you look at options that are 30-40% out-of-the-money and you look at options that far out-of-the-money that are 30 days left before expiring, 60 days left before expiring, 90 days before expiring, they’re almost practically at the exact same price. If that is the case, why wouldn’t you go out an additional 90 days when you sell an option? If 30% out-of-the-money a 1 month, 2 month, 3 month option is basically at the same price, go out an additional 90 days because you will get, when you initiate that short option, you will get 40-50% more premium by going out that much further in time. Yet, when it gets closer to expiration day, whether you have 1 month left on your option or 90 days left on your option, it’s practically the same price. The easy secret is to go an additional 90 days further than you think you normally would because, come expiration day, as we approach that time, you are able to cover that option 90 days left, 60 days left, 30 days left at practically the same price. So, very easily said, go out further in time. It allows you to get much more premium, in some cases 30, 40, 50% more premium, and as you near option expiration, you can cover it at 10% of what you initially sold it for. That is something that we do for our clients constantly. There are a couple other secrets. I can’t give them all away today, but, for those learning exactly what we do, that is something for you to consider. Quite often, a portfolio opens with us and they’re surprised at how far out-of-the-money we sell. Often, people think that gives the market a long time for you to be wrong. We don’t look at it that way- it gives us much more time to be right. That’s the way it has been turning out for the last several years. Michael: James, that is a great point, one that strikes home with me because I remember back in the day, years ago, we used to debate that. You used to always say it was better to sell further out. I kind of favored selling a little bit nearer. Over time, I came to see the light. Your way of going at it, I really saw the logic in it and the years have proven that to be an astute way to approach this. It seems to give you a lot more leeway, there’s a lot more margin for error, and you get a higher premium off of it. James: Michael, trading a lot is not what we’re interested in. Increasing high, high, high probability of option expiration is what we’re after. It all really pays off in the long run. Michael: Yeah, and you shared your favorite strategy for getting higher premiums. I’m going to share mine, too. We’ll give our listeners 2 out of the 7 that are our favorites. This is probably one of the ones you like, as well, because I know it’s something that we do often. In selling credit spreads, and a lot of people think that protection is expensive, you’re selling an option, you take a premium, and then you’re buying that protective call or put to limit or curtail your risk, which can be a great idea. Often times, after that first few months, and those options are already well into decay, the odds of those options ever going in the money begins to drop substantially. If you can unload your protection and sell it back to the market, that brings in some extra premium for your credit spread. You just let the nakeds expire. I know that’s one you like to use, as well. James: Michael, the time to do that is when volatility is the highest. Buying protection when volatility is low is expensive. Right now, buying protection is very cheap. Once again, it increases the odds of the trade going favorably for you. Buying protection right now is absolutely excellent timing to do that right now because of the high volatility, the high premiums. It gives us the luxury of buying protection and, talk about sleeping at night, option expiration happens worthless so often. If you can add protection to that, it just increases everyone’s odds that much more. Michael: Excellent. For those of you listening, if you want to hear more of those strategies, obviously we recommend our book, The Complete Guide to Option Selling: Third Edition. It’s available on our website, OptionSellers.com/book. We cover those strategies and many more for getting higher premiums and protecting your downslide, hopefully building a long-term income stream. We’re going to close this month by letting you know that we do have a couple spots left for our President’s Club. I have a client group this month that’s accounts $1 million and up. Those accounts do receive some special benefits. If you’re interested, you can feel free to give us a call at 800-346-1949. Other accounts, we do have some pre-qualifying interviews left in August. If you’d like to inquire about an account and schedule an interview, you can contact Rosemary at that same number… 800-346-1949. If you’re out of the United States, you can reach us at 813-472-5760. Obviously, if you’d like more information today, you can also find out at our website, OptionSellers.com. We’d like to wish you all a great month. We’ll be updating you on your portfolio progress on the bi-weekly videos. James, thanks for your great insight this month. James: Michael, it was my pleasure. There’s nothing that I like talking about more than short options on commodities. They’re getting more lucrative and certainly something that’s near and dear to our hearts. Michael: All right. Well, everybody, thanks for listening. We will talk to you again next month, and have a great month of option selling. Thank you.

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