TRP082: Power of Real Estate Investing

February 5, 2020


Randy: Hey, welcome to another episode of the show. This is going to be a great episode. We’ve got a great friend and client, Brad that’s here with us today. Brad, I want to welcome you to the show.

Brad: Thank you. Thank you. It’s a pleasure to be here.

Randy: For sure, man. I’m so glad that you could be here. I know you and Sandy are here in Florida kind of escaping the cold from up North.

Brad: Right, right down here, getting a little sunshine.

Randy: Yeah, for sure. Well, and I know even now because you are a client and an investor with us, you’ve decided to make a business trip down to Florida to come and connect together with us and discuss the investments here at our headquarters in Florida. Right?

Brad: Right, right.

Randy: Indeed. Indeed. So again, for those of you who are listening and you know, considering being a part of what we’re doing, you know, we’re headquartered here in Florida, so now you have the opportunity to come on a business trip to the headquarters and sit down and kind of discuss what’s going on. So that’s always a good thing. You want to be looking at how you can be tax efficient in your decision making. Praise the Lord.

Brad: What better place to meet?

Randy: Right, exactly. Exactly. Yeah. We had a great time today as well. Well, and then now even too, you guys are having a chance, I think talking together that you’re going to be heading down to the keys tomorrow.

Brad: Right, so we get to extend the yeah, and the business trip.

Randy: Exactly. It’s going to look for some real estate down there and the keys. Definitely envious. It’s been a number of years since I’ve been in the the Keys. We used to do a dive trip for about 30 to 50 people from our church and we’d go down there as a kind of summertime thing and just a super fun time. It’s probably been good Lord. Oh, I don’t even know. 15 years since I’ve been down there.

Brad: Time gets away from me now.

Randy: We’ve been diving other places in Mexico and Billy’s in Honduras and all like that. But the Keys are beautiful. So you guys will have a great time. So yeah, for sure. Well, and I wanted to, you know, I, I’m grateful for you to come on the show. I know that it would be a good opportunity for the listeners who are listening, really just being able to talk about what you have done and how you came to work with us. So I’d just like to ask you, you know, what had been your investment focus? I know you shared, you just really retired and we’ll talk a little bit about that and this past year, but so prior to that retirement and prior to us working together, what had been your primary investment focus or philosophy and what kind of things did you invest in?

Brad: Mainly the typical investment in equities, you know, like the stock market, like everybody does. We’ve done some investing in real estate, but I think management was a big issue there and then tended to not turn out so well. I think management, that’s the key.

Randy: You know, and it’s interesting too, no doubt there’s a lot of folks maybe that you know are very much like you that they’ve invested in. Probably the bulk of money’s in their plan has been in, you know, stock market type portfolio. But recognized that real estate is a good area and so maybe bought some rental properties, but then all of a sudden get the headaches of either the management’s not so good or you’re dealing, you know, some people really soldier it up and go directly in there managing tenants and toilets, you know, then it’s like, after about six months or a year or two years, you’re like, good God, this is terrible for you. You were a doctor for what, 30 plus years?

Brad: 32 years.

Randy: 32 years. Yeah. Again, a professional, a doctor, and then you got a tenant call him with problems or something like that, that’s like, you know, not a fun thing, a fun thing at all. so what we’re thinking about, and again, you’re not alone in that. No doubt. We get feedback and comment from people that even too, I mean, like in my early station ’03, ‘04 you know, we had a lot of direct tenants and it’s like, I remember even Sarah Jo being like, good Lord, what is earth is all this? Cause you know, we owned the money management company, you know that like I was the guy you were working with as a stockbroker or registered investment advisor, financial planner. And so I’m, you know, I got my suit and tie and all that. And then as we develop the real estate business, you know, we saw how powerful real estate can be, right? But we didn’t have the scale that we have of course today. And I feel the pain that a lot of people go through in that. And so that’s also part of why we developed our business. What was it? So you’re, you’re approaching, you know, kind of that retirement. You’re a young guy and thankfully you and Sandy are able to retire and enjoy life now, but what were some of the concerns that you had as you have the, you know, portfolio that you’ve invested in retirement on the horizon. What were those concerns that started you to think, “Hey, I need to maybe look at something else?”

Brad: I mean, and that was a big concern. As you know, your equities, they’re telling you “well at this burn rate, you know, you can take out this much”. And I think we’ve gone from looking at a burn rate to an actual build rate. I mean, we’re looking at income that we can count on that we can live on this and still be growing our portfolio of things growing at a certain rate. We’ve replaced our income when we have our money working for us instead of having to work for our money.

Randy: That is awesome. And it gives me goosebumps. Just hearing that, I love the quote that you said too, instead of a burn rate, it’s a build rate. And you know, think about that. Good Lord. So again, that’s true because again, a lot of times in that financial planning, stock brokerage, investment advisory model, it’s like, okay, we can achieve a six, seven, it used to be an 8% return when I was in that space you know, 20 years ago now and now it’s kind of migrated down where they’re saying, okay, we want to not take out more than, you know, 6% or whatever and then, but it’s kind of that, you know, we’re going to burn through capital over time.

Brad: Right. That was the concern is, you know, they say, well, when you’re 90 years old and if you burn at this certain rate, you should be good. I don’t like the should be good rate.

Randy: Wow. That’s, yeah, that’s true. You know? So again, you think about that, like that’s a lot of people’s situation is like, so you’re, you’re almost hoping to not live past 90. That’s not a competent place to be. As you came to that conclusion, a lot of people out there, you say, well, Hey, I know a real estate could be better, but then I need to figure out a better way.

Brad: Right, right. And then even in equities, I mean, I talked about management. You know, they say you invest in the management of the stock or the company or whatnot. You don’t invest in the stock.

And that’s what I found with, with Randy is, I mean, he’s passionate. I mean, and the management’s there. And they’re focused. On just on the individual. I guess rehab of apartment complexes. Not building new ones, not doing other things like that. One thing that struck me was when you said, “Hey, I got a buddy here that wants here would be a great place to build a complex.” Randy says, that’s not his business. Your business is rehabbing complexes. This is what I know. This is what I do.

Randy: Absolutely. I appreciate that. I was talking with another guy yesterday. It’s like we’re, what we do a lot of times does it appear sexy, but the accumulation in the maintaining of wealth and the outcome is sexy. It’s like, so our apartment complex is in Brad. The story I know you’re sharing is like I had a guy that was in Vegas, a friend of mine is like, Oh my God, we got this great development opportunity, ball land man. It’s going to be killer and like praise the Lord. Great for you. You know, because again, to Brad’s point here that we really focus on one thing we buy affordable workforce type housing. It’s designed for just regular Americans, blue collar, lower tier, white collar, 35 to $50,000 a year, income earners in areas where they need a quality, clean, affordable, nice place to live. And so often you know where you’re invested across the number of complexes, they all kind of feel the same, right? I mean, they may be in geographically different areas, but they have the same formula, right? And that’s really by design, you know, because we’re looking for a certain formula that generates a certain result that provides stability.

Brad: It gives me an opportunity to diversify into individual or separate projects. So I have that diversity within the, this individual investment are diversified in different complexes and that’s kind of our plan is, you know, get getting a, so every year you’ve got one or two of them, you know, turn it over. Cause that’s ultimately your goal is to turn them over and improve the cash flow or the business and be able to sell it at a profit. One thing you know is you make your money going in. And that’s another thing that’s impressed me with you is, you’ve got your systems in place where you can go in there and analyze this project with your team and you know, going in, here’s what we can pay and here’s what we’ll make. Come on the backside. I mean that’s impressed me with the, with your system.

Randy: Yeah. Thank you so much. And you know, so again, that’s part of our process. No doubt is where we incorporate a, and that’s one of the benefits of apartments is that you’ve got enough scale where there’s, you know, 75, 80 150, 170 200 units in one spot. So really we have the ability to incorporate that in its singular business. We underwrite it to account for the vacancies that may occur. And then when we purchased a complex, you know, we do a full scale due diligence with every unit we walk in and look at,  all the roofs, all the electrical, all the plumbing lines, there’s no stone left unturned. So we know going in everything that’s going on with the complex and then can account for what needs to be repaired and then how it’s going to operate. So very, like you said, very systematic approach to it. And that’s by design because then that way for you as an investor with us and for us as an owner as well, there’s no real surprises. It’s not like, “Oh my God!” you know, in the second year this roof is bad. Now we knew that the roof was bad and we accounted capital for it to be able to replace the roof. You know, the other thing I think that you mentioned, which is really powerful and I’m glad that you did, is that we, based on my investment management background, being an owner of a registered investment advisory firm for 15 years, we do a planning element. So again we use, it’s like a strategy where you know you’ve invested in this complex and it’s going to be selling in like roughly three years invested in this complex and maybe the pathway for the plan there is two years and then this other one is maybe four years. So what happens is it now starts to begin every year there is a complex that’s kind of maturing in its investment cycle and it’s being sold or refinanced that capital is coming back to you. You get that additional benefits of the capital that comes on the back end and then also we invest into another complex and again that restarts the depreciation which helps offset that income.

Brad: That’s what I was going to say. I wanted to mention that, don’t want to forget the K1 share. I mean, you get that by having an equity share. Also get a K1 depreciation expense, which helps write off income, which I mean, I mean that’s all part of the tax and tax rules that you get that basically almost writes off your income. I mean, you have, so when it’s free income, yeah, that’s,

Randy: I mean, that’s, yeah, I mean that makes you smile, right? Like, Hey look, we’re all for paying your fair share. Right? But there’s no value in paying more than your fair share. And so when you had this stock portfolio, did you ever get a K1 loss like that, that offset your gains, that really helped you out? You had a taxable liability. I mean, again, that’s a powerful thing. And if you guys that are watching and listening don’t know, it’s like that’s a huge tool. Huge, huge tax efficiency. The government has incentivized the tax structure for investing in a quality, affordable type housing so that then when you make an investment, roughly speaking, you know, you’re putting in, you know, we just use average numbers. And again, you can see on our website, even to you put in roughly $200,000 that first year, roughly speaking, it’s about a hundred thousand dollars K1 loss because of the depreciation. And so because of that, you’re now getting income that’s coming in. But on your tax K1 it shows you got a loss of 100,000 right? And so then, yeah, I mean praise the Lord, you’d be smiling too if you had that income and that K1 loss. It’s a great, it’s a great thing. And now, yeah, I think about this so, and again, for those of you in like what does that mean? It’s like the government has incentivized the tax code to allow for that depreciation laws because they want to incentivize Brad, Randy, you and everybody else to invest capital into this arena. Because what it does is it improves the quality of the housing stock that is here in the United States. And so it’s that really simple that that’s what they want to do. And they’re not as incentivized to say, “Hey, you invest your money in Google and Apple” and all like that. You don’t get the tax breaks. You know, so that’s part of also being wise about it. So let me ask you this though, that now you’ve been invested with us over the last almost two years now, and you made that transition, you know, prior to the retirement and the sale of your practice. How has that affected the quality of your life? So, because before you were on this kind of burn rate pathway down to, you know, maybe if I can get across the finish line and die at 90, I’ll be okay.

Brad: Should be good.

Randy: Yeah. And you know, and, and so now that that model is changed from a burn rate to a build rate, and with your permission, I’m gonna, I’m gonna reference that and hijack that term. That is a great, it’s all yours. So I appreciate that. So now that you’ve gone from the burn rate to the build rate, how has that affected your quality of life share with about what that’s meant for you.

Brad: Well, it’s been huge. I mean, when we were, when we’re analyzing whether we can retire, whether we can, I mean we were debating, you know, what do we have to give up? I mean, you know, to be able to focus on that night and you know, making it to 90 now we don’t have to do that. I mean, now we can live the same lifestyle we had before and we have enough money to do, you know, change other people’s lives. I mean, and part of, you know, like Randy’s goal is to change lives of people in the complex as they have a better facility to live in. You know, we’re just changing our life. I’m giving us that income that we can, you know, still support different causes that we…

Randy: Cause you guys to or supportive on you go on mission trips and support things through your church as well. Right. And so, I mean, that is such a powerful thing that instead of good Lord, and that’s a lot of people’s mindset out there is like, okay, so I’m going to approach retirement. What can I start cutting out? Like, all right, so I’m not going to take this trip, I’m not going to drive this car. I’m not going to go out for dinner so often. Because then I can just meagerly get through retirement versus now having the financial flexibility and the freedom to continue to live life as you were before and then giving money to support causes that are, you know, favorable that God has for your heart and Sandy’s heart. You said too, uh, how does that make you feel like being an investor where you know, is you’re invested across these different complexes, we’re genuinely improving the quality of life for the people that are living there. How does that make you feel compared to, you know, own in that basket of stocks you have?

Brad: Right, right. Yeah. You’re making a difference in this, in this world, and that’s what we’re here for. That was a big thing for me is, I mean, you know, before when like I say, what can we cut and then I mean part of the part of it was giving, I mean you’re thinking I still want to support these things but can I still do that? No and now I can.

Randy: Wow, that’s awesome. And that is so powerful, you know, and, and just think about that for the folks that you know, you’re listening right now are watching. It’s like that’s part of God’s overall plan for us is to maximize and do grow into be a continued channel of the abundance that is available. But now it’s again part of your part, just like you know Brad and see Sandy, you know, you guys came to a place where you, you know, started to make those decisions and that’s part of you gotta think it through and see like, Hey this is not maybe going to best serve me. It served me. Okay to this point. I mean cause you were able to accumulate capital, you know, through your working years, through those traditional channels. But then you recognize, Hey, this is maybe not going to serve me over the next 30 years. You know, it served me in the 30 years while I was building the practice and helping people in the medical profession. But then now it’s like I’ve gotta make a change. And so that’s part of the thing you gotta look at and recognize some of the things that helped you get where you are, are not the things that helped get you to the next level.

Brad: For sure. Yeah, for sure. And like you’re saying, I mean it’s, it’s kind of before you, you’re looking at a burn rate now. Now you feel like, do you know your stuff and snuffing out your life, you’re not going to be able to make that. Now we can.

Randy: Wow. That’s powerful. That’s powerful. And that’s, you know, it’s a good feeling. And then you can see it just with the, you know, the smile and the enjoyment that you have. You guys are, you know, skipping off now down to the Keys to go to have fun. It was some friends down there as well.

Brad: And you know, it’s can’t be all work, right?

Randy: No, exactly. Exactly. You’ve got to have fun as well too, you know, so that’s fantastic. And you know, I think it is a lot of times people are,  they struggle with change, right? Everybody likes to keep things the same. And I know, cause even as you were sharing about your story, I thought about me, right? So my degree is in finance and economics and that’s what I went to school all I knew at 18, like, Hey, I’m going to be a stockbroker and that’s boom, I focused on that. Got my series seven right after college, uh, jumped into the industry and man, you know, probably about five years later, started my own company and got my registered investment advisors license as well. And you know, did that for 15 years. But then I saw the power of real estate, the security that it had, the return that it generated. You know, I bought my first multifamily property in 1999 I think it was. And that was really beginning to be the seed of seeing how powerful that is compared to what was available in the stock market. And even to, you know, we were managing probably at the time, you know, $50 million for other people and, but recognizing that real estate is a better mousetrap, it provides better tax benefits, better security, better cashflow. But that was a struggle a bit for me because like I’ve always been a stockbroker and I’d always been a money manager and I had to begin to come to terms to make this change and then ultimately sell that business and move into this, you know, focus of the business share with me. Like what, how did that, what, what was that dynamic for you and Sandy? Because again, you had to begin to make that change and say, Hey, we’re not going to do this anymore. We’re going to do this. What were some of the hurdles that you faced or some of the other folks listening may be faced the same thing.

Brad: I suppose probably the biggest thing is like you say, yeah, you know, you’re, you’re making that transition in your life that, you know, well, I’m not working anymore. And, you know, people ask you, what are you doing now? You know, are you retired? Well, you know, I start out saying I was retired. Now I’m thinking, no, I’m still working. I’m just doing something different. You know? I mean, there’s still, there’s still a fair amount to do. I mean, we’re doing different things in the real estate world and then, you know, so I mean, there’s just, you’re doing different things.

Randy: He has an active in that way and being engaged as well and, right. Right know, and, and so when you stepped forward to do the first investments, uh, into the real estate, what were some of the things maybe that were just, you know, kind of, I don’t know if a challenge is the right thing, but again, this is different. I’m taking that step. What were some of the things that you had that were maybe a concern and then how did we get those addressed for you?

Brad: Oh you know, I, I guess part and partially you have to, you have to have trust. You have to have faith in the people that you’re working with. Randy’s the best, I mean, he’s over the top on everything that he’s doing. I mean, that’s what I’ve always impressed man. And like you say, you can tell it’s his passion. He’s not going anywhere. And you know, I, and I always talk to, and you know, whenever I talked to him, I said, you know, I feel like an underachiever in this project. I’m invested in as one complex, but he’s been out around the country and you’re looking at different ones and he looks at a lot of complexes, which is like I say, when he goes in there to buy a project, either here’s what he’s paying, which was impressed me either this is what it sells for it or it just doesn’t happen. I mean, he’s not out there just chasing things. I mean, you can tell he’s looking at a lot of different projects and either they fit your criteria or it just doesn’t work, you know?

Randy: Well, and I appreciate that’s the truth. It’s like we have a very disciplined approach. We looked at a lot of projects. You know, we were in a first break position with many of the geographic areas where we’re get properties that are brought to us off market and various channels. It doesn’t make this everything that glitters is gold. So we have a discipline process that we go through, you know, 30 40 50 projects to find the one that looks good and then, you know, even when that looks good, it’s got to meet our specific criteria in order to be a quality investment for us and our investors. And indeed I do. I love, I mean it brings together all of my background in finance, money management, the creativity of the real estate and the passion to help other people. You know, because it’s like now I look at, that’s what I said.

You gave me goosebumps when you shared that story in the very beginning. Cause it’s like that’s what we are living for is to transform the lives of the folks that live in the complex, that they’ve got a better quality of life living in this, you know, thousand dollar, $900 a month apartment. And then the folks that invest with this like Brad and Sandy have a better quality of life too. Because now it’s like you’ve got joy and confidence about the income that you have. It’s not a concern like, Hey, I’ve got a die at 90 in order to make it what a terrible thought. Right? Like it’s like, okay, if I die soon enough, I’ll be okay. That should be good. I mean like so yeah, like Morgan Stanley, that’s their banner die soon enough and you’ll be okay. I mean like I’m not picking up or whatever, but it’s like, wow, you know? And so to be able to transition to just greater joy, more fulfillment, the ability to give, to really live and enjoy, that’s I believe, God’s purpose, right? Like you know that you’re helping other people with the capital that God’s put into your hands. You’re enjoying the fruits of your labor. And then you’re giving to others to help them and you’re making a positive impact where you go, right? Yeah. His plan wasn’t for you to come sliding in home.

Brad: So yeah, it’s all good. And like I say, there’s a, there’s a camp close by and then we like support and like I say, the mission trips and yeah, it’s fun and it’s fun. It’s fun.

Randy: Thank you so much Brad. I appreciate you coming on the show today. It’s really great for you to be a part of our show and even to, to be a part of our lives. We love having you and Sandy be a part of what we’re doing. And you know, really that’s our goal is to help good quality people. And so, uh, I’m grateful for you coming on and sharing with our audience and, uh, you know, thank you so much for coming and I look forward to seeing you guys again real soon, right? For sure. Truly a blessing. Absolutely. Thank you so much.