Timeless Investments: Unlocking the Potential of Real Estate | REIal Talk | The Freedom Show | EP.95

Foreign.

Hey, you guys, my name is CJ and we're here with podcast episode 95, focusing on timeless investments and kind of unlocking the potential of real estate. Today we're joined here by Ben. Ben, do you want to introduce yourself?

Yes, I'm Ben Kutt along with cj. I'm a member of the investor relations team. And it is great to be able to discuss the topics we're going to talk about today about this whole relationship between time and investments, how investments are a form of currency that are based on the time that you've already invested to create those. So a lot of interesting topics that CJ is going to introduce to us today.

Yeah, certainly. And I think, yeah, all, all different. There's so many types of investments out there and they all take different amounts of time to kind of make that, you know, take the energy to purchase that investment and also selling and what, how long you would like to hold it. Right. So there's all different types, but I'll get started here. So then what are some various investment strategies and that you have or you encourage others to kind of think about and how are they influenced by like the factor of time, you know, whether that's the time that it takes to invest in it or just that ongoing sense of time.

Yeah. And this is a very important question to ponder, especially as investors, like many of you who are listening are considering what type of real estate investments you like to make, what best fits your unique situation. So as a starting point for our discussion here, let me just give a quick overview about what we offer at the Freedom Companies. And I want you to think about these possibilities in the term of a scale where we're going from most active, which means requires most of your, the most participation on your part to the least active, which is what we refer to as passive income, retirement income, which is income in which you have little or no requirements. It's work free, worry free type of income. So let's start off the first. This is when we have calls with CJ and I. This is kind of an overview of the Freedom Companies and the opportunities for you as investors that kind of follows along this scale. The first way of making income with us is owning property. And this is primarily through our turnkey operations where you can own a single family, duplex, triplex, quadplex, et cetera. So the first investment strategy is ownership. And this typically requires more participation. And CJ is going to talk about this because he owns a lot of properties and he can tell you firsthand the type of participation in Decisions that he needs to make as far as ownership. So, cj why don't you share a little bit about that and then we'll go on down the scale after that.

Yeah, thanks, Ben. And so what I would say is with our turnkey investing, we are trying to take out a lot of the time that personally, I've been very active in purchasing, sourcing my own deals, purchasing my own deals, you know, coordinating the rehab with the contractors of my own deals. I do have a property manager who manages it after the fact, but I'm very active on that front end. Right. And so in our spectrum of what we offer here at Freedom, it is the, you know, most active, because it still is active ownership, but we try to take out a lot of those pieces because we are going to find the tenant, do the rehab, you know, allow you to purchase it, and kind of refer you to all those people that you need, whether it's an inspector, coordinate the appraisal, and all those things. But still there is going to be an active, ongoing participation that you have to make the decisions. When do you want to sell? What type of repairs do you want to do? When certain capex issues pop up. Right. Like our property manager at Independence, Property Management is going to be coordinating with you in communicating what things arise with the property. Right. When maybe a tenant moves out, what do you want to raise rent to? They'll give you an opinion, but ultimately those are still decisions that you get to make because you are the owner. Right. So it is a more active investment option than maybe some of the other ones that we offer, being private money lending and syndication, which you can probably talk to greater.

Yeah. So you we have in house, and this is a quick review here. We have vertically aligned companies, so when we offer turnkey properties, you have several points in which you can step in to actually purchase the property, depending on how active you want to be. Some of you are very good at renovation and you want to do that yourselves. Most people don't want to bother with that. Talk a little bit about, from your perspective, C.J. this idea that if time is on your side and that means you're more towards the young adult end of the scale versus getting ready the season in life where you just want to retire. How does time become your friend when it comes to ownership in regard to being able to pay off your. Whatever the loans are and be able to see this appreciation that can take place in the next 15, 20 years, how does that whole formula fit together in your thoughts?

Yeah, so I think a lot of People and a lot of people that we talk to, you know, they want to be active or maybe invest more time because that's the resource that they have early on in their career and they are willing to put in some, like to call it like the sweat equity. Right. Whereas, you know, a lot, we talk with a lot of people who are our private lending and syndicator investors are maybe a little later in their time horizon. Right. Where they don't have as much time, they don't want to put so much input of time in and they want a more scheduled return. Right. So they know exactly what they're going to make on a quarterly or yearly basis. So I think that's a big question. It's one of the first questions I bring up in our conversations is how active do you want to be? Right. Where are you at in your life cycle of life? Right. And just how important is that time component versus the returns and everything else? Right. That goes into particular investment.

Yeah. So it comes down to. So again, the theme of our podcast is Time vs Investments. If you're in a season of your life where you are generating tremendous amounts of income, then one of the questions about investments is how involved do you want to be in your investment if that distracts you to some degree from your income generation, Would you agree with that?

Yeah, 100%. We have a lot of, we deal with a lot of business owners, Right. Who are spitting off cash in their business. Right. And they just want to know that they have a place where they can. We have a couple investors who every couple months they're putting additional large sums of money with us because they like the returns that we're offering on the terms that we offer and they don't have to think about it. Right. It's very passive to them from an additional time perspective. And they just know that money is going to start growing every, you know, every quarter or, you know, even daily, but it's paid out quarterly.

Yeah. So the first stop on this scale from active to passive is ownership. We've just given some time talking about the various factors to consider as a person. For instance, if they're in a season of generating great income or their season of life where they're just wanting to retire and have work free, worry free income. Then the next step from passive towards, or excuse me, from active income towards passive is private money lending. In private money lending, you're still involved in this turnkey operation, but it's more from the lending side. And CJ talk a little bit about how that frees you from the ownership responsibilities.

Yeah. So we have a couple different options with private money lending, depending on how long you want to hold your capital with us. Right. You know, as short as six months, up to five years. But really it's a set, you know, return. We pay 8 to 12%, you know, for our private lenders and they're going to receive that in different, you know, terms. But they don't have to worry about the renovation, the status of the property, like all these factors because we freedom take on all of that active ownership. Right. They are simply lending us capital on the deal, on the thousand plus transactions that we've done as a company. And they know that they're going to get a set return at the end of it. So they just are. They are. Okay, because. Or not. Okay. They prefer this because there's a lot less variables involved. Right, right. They know the length of term, they know the return that they're going to get and they don't have to worry about any of the other details along the way. They simply make the decision to invest and then they are going to receive their, you know, quarterly or distributions and receive updates from us on a monthly or quarterly basis.

So their, their participation is initially doing their due diligence, looking at that particular property. What once that's done, then they can invest their money. It's a shorter term investment, four to six months to a year. Their participation is done at that point. It's other people that are making those decisions. So it's that one step closer to passive income. A little bit of participation at the beginning. The rest of it's passive. So the first step is owning property. The second step is private money lending on a short term basis. The third step towards passive income is what we call the debt fund. And the Debt Fund is a 506B fund in which you can invest money. And rather than like private money lending where you have to do the due diligence for each deal in the fund, we allow us the company to be able to do the due diligence for each properties and we invest that. So talk a little bit about the debt fund and how that differentiates.

Yeah. So with the debt fund or our Masternotes, it's really a longer term hold that someone is looking for. Right. So our private money lending is a one single property. They're going to have to re up after 6 to 12 months and kind of keep that being more active. Whereas we have a lot of people who want to utilize maybe a tax advantaged account, something that has a Longer time horizon. And so they don't again, want to have less worry. They just want to know that their money is at work earning a return. And so that's what our debt fund allows them to do, is place that money once. Right. They do the due diligence on us as a company or maybe have done a single private money loan with us, but now they want to just put their money to work for the long term. And so this is a great option for them to receive that, you know, quarterly distribution for a longer time horizon and again becoming that much more passive because they're not having to do recurring due diligence or wiring money back and forth, you know, and receiving money at different times. It's like a set schedule. And they, you know, I don't want to say set it and forget it, but you get what I mean on that front.

Yeah. So they're. The participation on the dead fund is you do the due diligence at the beginning about the nature of the fund, about us as a company, of course, and then once you make that decision and participate in the debt fund, then you, for the next three years, the company just does their thing, as we've done. We're very successful and good at what we do. Then you don't have to make these individual decisions. When the private money lending is done, you don't get the check back and have to redo again, just as you described there. So you can see there that it's the same idea where this third step towards passive income allows you to have even less time commitment, less active than the private money lending. The fourth area is where we talk about syndications and we have a little bit longer commitment. Talk a little bit about the difference and some of the differences between the syndication participation and the debt fund.

Yep. So our syndication, our syndications is we are raising funds, funds from investors like yourself to invest alongside us, freedom to go purchase larger, typically larger multifamily assets, apartment complexes. So we are pooling our funds and yours together for the down payments on these properties that typically have a value add component. So you're going to own a certain percentage of that deal from house, however much you invest on the upfront, you're going to assess the deal, assess the opportunity, and what our business plan is to increase the value of that property over certain, typically longer time horizon, five, three, five, seven years, whatever it may be for that specific property. But because you have a certain ownership, you're able to receive some more benefits beyond just a typical preferred return. We're also able to pass certain tax benefits that come with actual ownership. Right. So we send a K1 tax document at the end of the year. We perform, you know, cost segregation, which allows us to take bonus depreciation. And, you know, in this past year, most of our investors received over 40%, you know, loss or tax loss from that bonus depreciation in addition to the preferred returns or the returns that they are receiving, which are typically greater than what we can provide in our masternode or debt fund. Private money lending. So you're able to get multiple types of returns, but it's more passive, again, because you're investing and doing your due diligence one time, and we're able to hold that asset for a long period of time and then, you know, send those quarterly distributions to your bank account and give you updates on how the business plan is kind of proceeding. So the key difference is act you're actually having ownership of the deal and you're going to be able to receive tax benefits in addition to your preferred returns. Does that make sense?

A lot of sense. So again, you have the factor of time. You also have, as CJ Just mentioned, a factor of tax benefits that can assist you on your investments. If your active income is higher and you're having a high tax bill on that side, then on the passive income that you have, total other types of passive income, that can be very influential. So what we've seen here is in these four different types of income, you see this scale from actively participating to a little bit less participation, all the way up to completely passive income. And so how that affects your decisions as far as your type of investment depends upon on where you are and what season of life, how active do you want to be to be able to create that investing income?

Yeah, yeah, and that's exactly it. And I think that's the conversation that you need to think of as yourself, as an investor. I just talked to someone yesterday who was very new in this exposure to real estate and is trying to figure out how to make money with real estate. And I said, yeah, it's a problem because there's so many ways to make money. Right. We just listed four that we offer as a company. But there's also other ways that are much more active. Right. You can be flipping properties, you can be purchasing rental properties on your own. You could be wholesaling. There's, you know, so many different ways to invest. We offer more passive ways because that's our audience, that's who we're trying to cater towards. But it really Depends where you fall on that spectrum of what, what do you have? Right. Do you have more time or do you have more capital? Right. And that typically dictates kind of where you are going to fall on the spectrum of what you're going to do. Right. Typically like wholesalers or flippers have more time, but maybe not as much capital to put to work. Whereas people who are investing in syndications or private lending, you know, more passive side, have more capital, but maybe they don't want to put as much time into their investments. So I think it's a really, you know, it's a key decision to understand like where you should focus your efforts when it comes to investing or real estate investing more specifically.

And so those are, those are great insights in building on that. Part of the second question here is I want to pick out one aspect of it which is market cycles. So as you as an active property owner, when you think about market cycles and you think about the recent appreciation jump that took place because of pandemic because of low interest rates, a bunch of people jumped in, you had a lot of crazy buying that was going on. What would you say to potential investors that are thinking about ownership, active participation as an investor in terms of where we are in the market cycle and particularly in terms of appreciation, do you, what would you tell them after we've just had this jump in appreciation?

Yeah, I think I, you know, I'm someone who doesn't like planning for appreciation. I'm much more on the cash flow perspective to make sure I know that all my bills are going to be paid every month and I'm going to still receive a piece afterwards. I would say, you know, don't plan for it to happen again. Right. Especially with where interest rates are at and all of this. Like I think some, there are a lot of investors that think, oh, I'm going to buy a property and two years later I'm going to be re able to refinance and pull out all my money after not doing anything. Right. Because the appreciation has just increased so much. I'm going to gain $100,000 on my home in two years. Right. Unless you're forcing that appreciation, it's very difficult to do and replicate what's happened these last three years with the market. I really like to think of real estate as a long term investment and it shouldn't be thought that you're going to get rich quick in one, two or three years.

70 day forced appreciation, is that like in the residential side? Is that like flipping the house? You do this great value add and then you can flip the house.

Yeah. Typically forced appreciation is. Yeah. Finding something that's under undervalued or under appreciated. Right. Maybe it needs rehab like you said, like a flipper comes in. Maybe someone comes in and takes a property and turns it from a regular rental into a short term rental, thus increasing the income significantly, which is probably going to increase the value of that property as well. So there's a lot of different ways that you can force appreciation in a certain area or a certain property. But like when you talk about kind of when you talk about this idea of market downturn or where we're at and trying to catch the ride and catch appreciation again, I'm of the mindset, you know, and a lot of the people we talk to are coming here to Ohio to invest because they believe in cash flow more. You know, they don't want to invest in their backyard in California where things are priced so absurdly that they can't even cover their mortgage payment with their rent. But they want to invest somewhere where they know they're going to make make a return on their money every month rather than betting on that appreciation after a couple years.

So if the appreciation because the market cycle because of crazy. There's several markets around the country that have crazy high prices right now, then you're saying that a focus refocusing on cash flow might be the longer term higher percentage play rather than trying to count on the next repeat of the last couple of years appreciation.

Yeah, yeah. And I think you're going to just have a more success. You're never going to be caught in a bind. Right. You don't ever want to be in a situation where you aren't able to cover your debts or your payments owed for all the expenses on a property. And a way to ensure that is being in a more cash flow focused type market.

Now for listeners who are not as familiar with multi family type properties, talk for a second about how forced appreciation in multifamily is different than forced appreciation as you just mentioned in residential.

Yeah, that's a great, that's a great point. So I personally own rental properties here in Dayton, Ohio and up until this point the majority of them have been residential, which is one to four units. And in that model properties are valued mainly based off of their comparables. Right. So what is a like property to that, another three bed, two bath within a certain mile, you know, mileage from that home. That's what they're going to comp your property off of. Whereas commercial Property. What we focus on for our syndications is based off of the revenue or the net operating income revenue minus expenses of that property. So you are able to force appreciation by increasing rents, decreasing costs and things like that. So I'm actually right now in the middle of this with I have a 10 unit property that I am in the middle of refinancing where I have over the course of the six months there were a lot of vacancy, a lot of delayed maintenance and things that needed to be addressed with the property. I came in, addressed those and doubled the revenue that this property was producing over the course of six months. And so now I'm able to go back to the bank and get a new appraisal on the price based off of the revenue and credit current expenses, which will hopefully and should appraise the property at a much higher value. Right. So that is like forced appreciation or forced equity with multifamily investing. And that's why we like it and Danny loves it so much. Right. Because you are in control or in the driver's seat. Much more so than what are the comparable sales in your market.

Very exciting. So what are the thoughts about time and investing you have as far as when people should take action? There's uncertainty right now in the market. What would you say to people that are like as far as ownership or as far as syndication like we talked about? What would be your advice as far as taking action?

Yeah, that's a great point. And this is probably what I am most passionate about. Like, in my opinion, you have to get started even if it's not in the way that you are going to invest long term. There are so many people that we talk to who have maybe listened to 100 podcasts or a thousand podcasts and read all these books, but they still have not taken action. Whether that's investing in a rental property syndication or private lending. There's ways that you can invest in real estate that aren't long term. Right. If you don't want them to be. But I just think you learn so much more once you actually take action. And you know what I say is your first investment probably isn't going to be your biggest win or your home run deal, but it's going to lead you to that home run deal. Right. So you have to take action for that first investment in order to reap gains in the future. Yeah, that's what I would say. How about you? Anything additional?

Well, I think, and I was kind of looking at some numbers here as you were talking. What I encourage Every listener to do is to look at investment possibilities, whether it's with us, with others, if it's the stock market or real estate or whatever, to look at investing possibilities that allow you to put time in your favor. And I'm getting a little bit philosophical work wise here, but when you think about your ability to make money, in many ways, each of us as income producers are like elite athletes. They're so there's just a certain number of years that we can go out and create that income. And if you're a business owner, you might be able to extend it a little bit because you own it. You can start to raise up managers that kind of run the business and you still can create income from that. But for most of us in employee type situations, we can only work for so many years. And if you're into your 40s and beyond, you start to see the end of that, where you go, I've got 15 good seasons. Using the sports metaphor, 15 good or 20 good seasons left, in which after that my income per reducing skills and opportunities, whether it's because you no longer want to work or because you no longer can work, are going to start to be reduced dramatically, significantly. So what is it that you can do now while you're generating income to take a small portion of that of your savings and income that you're setting aside to be able to invest it in a way that years from now it's going to continue generating income for you? It's going to be like hiring employees of your own as investments that generate income. So that's one of the discussions that we encourage you to have with CJ&I offline, where we can talk with you about your unique situation, where we can talk about how just a small portion of your savings invested now will allow time in the next 15, 20 years to supplement your passive income. And so I think the final thought is, as far as time, eventually in investment, the end game for all of us is passive income. At some point in our careers, when we no longer can work or no longer are able to work, the amount of or want to work, the amount of passive income that we have will directly affect our level of lifestyle directly. And so it starts with Social Security income, which you can kind of get on socialsecurity.gov and see what your projections are for that. And after that, it is whatever type of investments that you have that will directly generate your income. So the question now is, and the theme of our podcast is how can you have investments in a variety of investments, but for estimates that will allow you to, in the years ahead, 15, 20 years down the road, generate consistent, predictable income that allows you to enjoy, continue to enjoy the lifestyle that you're having now during your active income years. C.J.

Yeah, no, Ben, that was a great way to end it. And I think, you know, we, I just want to really encourage our sentiment. Like Ben and I are passionate about personal finance, you know, freedom of time, everything that we've kind of talked about today. And we'd love to, you know, further that discussion with you guys on a one on one call. So we'll link in the description here to our ways that you can kind of get in touch with us, get on a phone call or zoom, whatever you guys like to kind of help you through these, you know, this big topic. So thank you guys so much for listening. If you're still here to listen to us, we look forward to being able to help. And we always end everything with invest smart, live happy. All right, thanks you guys so much. Bye.

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