Real Estate Investment Opportunities Series - Wellings Capital

Welcome to a White Coat Investor Real estate webinar. I'm here with Paul Moore, the founder of Wellings Capital. Welcome to the webinar, Paul.

Hey, it's great to be here. Thanks, Jim.

Let's start with a presentation a little bit not only about real estate investing, private real estate investing, but also about Wellings Capital in particular. So I'll turn the time over to you to start with, and then we'll move into the Q and a portion of the webinar.

All right, fantastic. You know, I'm excited to be here because as you know, Jim, a lot of medical professionals know about the historic tax benefits and returns and wealth building potential of commercial real estate, but they don't know how to start or who to trust. And that's the power, I think, of White Coat Investor. You've done a lot of the work for investors by figuring out who to trust, by vetting folks like all the operators that you have. And I think what's really important is it allows medical professionals to get back their most precious commodity, which most people would say time, but I would say focus. It allows them to focus on their careers, focus on their family, focus on getting back their lives and still getting the benefits of commercial real estate. So today I'm going to talk about what has happened, what's going on right now in 2025 as we record this, and also what we think, you know, kind of throwing back to, you know, what lessons, what risks do we have from what happened in the last decade? And then we'll talk about how medical professionals can get a diversified portfolio through Wellings Capital. Is that all right?

Yes, sounds like a plan.

Okay, great. So we've got a couple really important disclaimers, really important that you take the time to read this. This is for accredited investors, and it's not a solicitation to offer or sell securities. If you want more information, you can reach out to us@InvestellingsCapital.com to schedule a call or learn more. So I've been investing in real estate since before the turn of the century. Don't you just love saying that, Jim?

Turn of the millennium, really?

Yeah. Right? That's right. So I had an engineering degree, mba, worked at Ford, spent five years building my own company, caught Wall Street's eye, sold it in 1997, started investing in real estate in 1999. I've written three books on real estate, been married for almost 38 years. We've got four kids. And I like to say that this is my favorite accomplishment, but I really didn't act like it when I was raising the kids. Honestly, I was doing a lot of what we built Wellings Capital to help White coat investors avoid is exactly what I was doing wrong. I had way too many plates spinning at once. I was trying to chase shiny objects. I was trying to invest in real estate, trying to deal with toilets, tenants and trash and all kinds of other things. And honestly, the plates crashed a few times. That's another story. It does explain why I co hosted a podcast called how to Lose Money. It was a wealth building podcast to be fair, but we talked to 238 successful investors and operators over the years about their plates that were spinning and crashed and all that stuff. But at any rate, the Wall Street Journal recently had a great article explaining the significant supply and demand imbalance in favor of multifamily operators and investors, which is honestly quite painful for tenants and folks who want to rent multifamily. There's a significant supp and demand imbalance. This piece explained that the recent slowdown in multifamily construction means that the current apartment shortfall will actually grow in the coming decade. It's really serious. It's a real serious situation for renters and appears it seems like it's great news for investors. But that may not be true. It may be. It could be true, but. But it may not be true for you if you take the wrong moves. Going back all the way to 2022, this study, kind of a landmark study, showed that There was a 4.3 million unit shortfall that had to be bridged by 2035, which seems incredibly unlikely. This kind of reminds me of the great financial crisis in 2008. Real estate development came screeching to a halt, home prices dropped, rents dropped, and a lot of multifamily was lost back to the bank. But as the market rebounded and the demographics continued to shift in favor of multifamily syndication, what happened is there was a boom that was less about sound investment principles and more about easy money, aggressive syndication strategies and reckless leverage. I know you remember that. And then there was the passage of the JOBS act that fueled more syndicators, people who were in junior high school during the great financial crisis. There's nothing wrong with being in junior high school during the gfc, but a lot of them now were actually leading and teaching and they were what I call new gurus or new ruse. That's just my term for that. And a lot of them were using really risky floating rate debt, overpaying by 2030% and they were ignoring the fundamentals. And, you know, basically, Jim, everything had to go right to make their deals work. And the crazy thing is it did. Everything did go right. Because what happened is a rising tide during that whole decade really fueled this. I was part of the problem. I wrote a book called the Perfect Create Enduring wealth from the Historic Shift to Multifamily Housing. And basically this book, along with a thousand other things, fueled all this excitement. Lots and lots of people who were had all kinds of different professions jumped in as syndicators, and some of them became, like I said, Nurus. And they were speculating, but they were calling it investing. Unfortunately, a lot of investors took the bait, and I'm afraid many people listening to this were among them. There's a lot of pain out there right now. And a lot of it came just because these shiny objects, these glossy brochures, told a great story. And a lot of people did make a whole lot of money along the way, doubling their money every two or three years until the music stopped. And that music took the form of 11 rate in interest rate increases in about, I think it was 16 months. Warren Buffet, this is a paraphrase, but he said, a rising tide lifts all boats, but someday that tide will go out, and then we'll see who's skinny dipping. And we've experienced that rising tide from all the way through the teens, all the way through 2022. A lot of people, like I said, made a lot of money. There was a rising tide. And what's crazy about the rising tide, Jim, is that the people who took the biggest risks made the most profits. If you have the same exact deal with the same exact outcome leveraged at 50% and another one leveraged at 75%. The 75% folks who took much bigger risks are going to have double the appreciation on that equity. Some people took much higher risks than 75%. And I, as you know, the author of that book, went on literally dozens and dozens of podcasts. I had my own show on biggerpockets for a while. And I warn people, hey, the perfect investment is not perfect if you have to over leverage, overpay, and believe. All these things have to go right. And of course, the tide did go out. Those 11 interest rate hikes in 15 or 16 months didn't really cause the problem, they just exposed it. The problem was in the behavior of syndicators. And a lot of syndicators assume past rent increases equate to future rent increases. Rents in Tucson have risen 18% for the past two years. We're only assuming a conservative 9% rent growth in the next five years. Well, that's not real smart. They overpaid for already overpriced assets. They use risky short term floating rate debt. They employed unrealistic underwriting and in the words of Howard Marks of Oak Tree Capital, they believed that trees really do grow to the sky. Trees in this case is rising rents. But trees never go to the sky. And the bull run ended and Wellings Capital had already pivoted four years before this. I'll get back to that in a minute but a lot of people, like I said, are feeling a lot of pain right now. It's interesting, there was an article talking about the new kings of multifamily. It was a couple 30 to 32 year old guys. In November of 2022. That article came out by January. There was another article about the exact same guys saying that they were on the verge of losing everything for their investors. And again, the ones who took the biggest risks looked like heroes until they didn't. Wellings Capital has a different model to serve our investors and I'd like to talk about that real briefly right now. So Wellings Capital's funds are for investors who need a low to mid teens tax shielded yield and are not willing to tolerate the high risk of speculating with a lot of folks who are often newbies and and they want to diversify outside the stock market. Our fund seeks to provide diversification across multiple asset types, geographies, hand picked operators, assets, strategies. We do rigorous due diligence. We provide access to preferred equity deals that can't be accessed by individuals. We invest in historically recession resistant asset types that provide tax benefits and cash flow and appreciation. We provide full transparency, audited financials, quarterly reports and monthly distributions. Some of the things that make us different again are the diversification. Investors with a $50,000 investment can get diversified in all these different ways. I mentioned deep dive due diligence. We have a 27 point checklist we'll talk about in a minute. Access. It's impossible to get access to these deals on your own and better terms. Sometimes you could get access to these, but on some of those deals, for example, there might be a 6040 split. We can get an 8020 split because of our size and relationship. So I'm going to talk briefly about due diligence. I'm not going to go through this whole checklist but I can tell you that we take very deep dives. The other day we had a perfectly good deal by a good operator. And we said no to it based on their currently owned real estate, their schedule of real estate owned sreo in the second line there. Some of their other stuff wasn't performing real well. Now what investor looks at all the other stuff and makes a decision based on that? But we look at that every time we said no to another syndicator because they didn't have skin in the game. We've said no to countless folks who were not aligned, who had terms buried deep in the PPM that nobody would even think to look for. That we did. We said no to one deal at the closing table after we'd wired the money because they sprung out a different term that they hadn't told us before. And we might have been able to live with that term, but we couldn't live with that behavior. So we got our $5 million back. And that's the kind of stuff we do. NOI audits. Those cost eight or nine $10,000 to audit the NOI, but we do that and it's never at the investor's expense. We charge it back to the operator. That's the kind of negotiating power we have. Last year was kind of painful. We passed on 740 of the 745 investment opportunities we looked at, which means we invested in less than 1%. And I would just challenge anybody listening to say, do you have the expertise and the time and the team and the resources to do this kind of due diligence on your own? Because I mean, it's like I said, it's painful. It took a lot of money, a lot of time to do all that. We also provide diversification. Right now we are focused on recession resistant asset classes including self storage, manufactured housing communities, AKA mobile home parks, RV parks, light industrial, multifamily, open air shopping centers. This is a breakdown from our recently closed fund that you invested in, Jim. We also diversify across geography. One investment of $50,000 can get you in a lot of states, which can be a downside, as you know, because it also means tax filings in some of those states. So some of our investors like me might have to do tax filings in half a dozen and eventually over a dozen or even up to two dozen states. So that's something to think about. Now that's in our PASS fund. Our future funds might be different. Stay tuned for that. A lot of folks hate their syndicators right now. And I'm not talking about any of the white coat investor syndicators because that's, you know, you guys have already Vetted them. But there's a lot of folks out there who were not vetted. A lot of folks invested with syndicators they hate, would never invest in again. In 2023, half of the money we raised, just under half, came from current investors reinvesting. We're really proud of that. And we thought that that was a milestone we'd never surpassed. But in 2024, actually, 73% of the investments we got were from current investors reinvesting. And so, I mean, that just speaks to, you know, the performance. It speaks to our communication. It speaks to people believing in the vision. So I'm going to jump into a little more educational content here. I want to talk about the relationship between risk and return. Okay, fill in the blank. Low risk leads to low return. So high risk leads to blank return. Now, if you were listening today and your brain went to high. High risk leads to high return, you gave the most common answer. But common answers are often wrong answers. And that's what led to a lot of investors getting this wrong. I got it wrong myself for years as an investor. High risk leads to high potential return and also high potential losses. Otherwise it wouldn't be risky. So here's a more accurate drawing showing the relationship between risk and return. You can see that increasing risk gives an ever broadening spectrum of potential outcomes. In fact, it's really worse than this graph shows because it could be down here, your return could be here, it could be even negative. You could lose your principal. And a lot of people are doing that since 2020, as we know. So risk and return. Thinking about it that way, we like almost everybody else. Wellings Capital started out. Our first version was investing in common equity. And that's real common. Most people start that way. When I started investing in real estate around the turn of the. What was it? The turn of the millennium. That's all I knew about. And that's what most investors do. That's where we started. Most of us had a great run from the middle or the end of the great financial crisis for about a decade. And we really never thought much about any other type of investing. But we had to pivot because of this little thing called 11 interest rate hikes, like I mentioned, in 15 or 16 months. Unprecedented steep curve in interest rate increases. And the rate hikes weren't the problem. They were just a spark that lit the fire. There was already a dry pile of wood heaped up because of what I shared earlier about overly optimistic syndicators and overly optimistic investors who believe those syndicators we already discussed that in length, but we pivoted in late 2022 and we did our first investment in debt. Now, it made a lot of sense. Debt offers cash flow, it offers low risk, it offers low upside potential returns, but it's completely capped. So we did one debt investment and then we realized there's probably a better way to do this. And if you've been around Wellings Capital long, you know that we've spent the last two years talking almost nonstop about preferred equity. Now, preferred equity, around 50% of our last fund was composed of preferred equity. Preferred equity gives a return like ongoing return, like debt, but it has upside like equity. In fact, Warren Buffett invested in preferred equity. He invested in $5 billion of Goldman Sachs when nobody else would touch financial stocks like that with a 29.5, 39.5 foot poll back in September of 2008. But he did and he made a lot of money through it. The problem with preferred equity is as times get better, as we think it's likely they will in 2025 and the next several years, it's got a capped upside. So while a lot of preferred equity deals we did had something like a 9% current pay and another 8% compound accruing upside, it was capped at that. There was no way to make any more. So we thought there must be a better way as we get into better times. And we found that today we're actually introducing our fourth iteration, which is JV hybrid equity. Now we made that term up. Don't Google it. It's basically the next evolution. It offers the downside protection that preferred equity has. But unlike preferred equity, it has the returns that are more similar to common equity. In other words, there's unlimited upside. And we think this is the best risk adjusted return profile of anything we've ever invested in. Of course, everything has risk and there's no guarantee this will work. But we like this, this model because it shares the advantages of preferred and common equity. Common equity takes the first loss position, meaning that if there is a, let's say 10 or 15% loss on a deal, it's likely it won't touch our principal. The payment priorities ahead of common equity at the liquidity event has unlimited upside like common equity does. There's no lien like debt, but it has tax benefits of equity. We get limited management control rights that we're able to negotiate. And what this does is, Jim, it opens the doors up to many more great operators and deals than prep equity. A lot of folks would not, you know, they didn't want to pay the 9% current pay and have an additional 8 or 9% accruing compounding upside. And I understand that. But this model allows them to jump in without that fixed return. In other words, it's more like common equity in that sense. A lot of individuals would love to do this on their own. Honestly, they can't. I mean, a large family office, I mean, we just wrote a $15 million check for JV Hybrid Equity. A lot of individual investors, I mean, family offices, folks like that, could do this. But most individual investors would not be in a position to have the chops to negotiate this, to find these deals, to do all the legal vetting, and to do everything else that needs to happen with this. I mean, Fannie and Freddie have to approve us if it's a Fannie or Freddie deal, if they're in first position with the debt. And that's a pretty high hurdle within itself. So before we land the plane, I wanted to show you our track record. Now, this is the track record of individual deals. These deals are no longer available for investment right now. But you can see that the average Equity multiple, the MOIC second to last column multiple on invested capital is 2.4x, which means there's about 140% profit in an average of about two and a half years. These were held. Now, a lot of these were acquired in 2018, 19, 20 and sold in 2021, 22. And therefore times are really good then. And we don't expect that this will be an average of all of our investments, but these are all the ones that have gone full cycle so far, except one that didn't make the list yet due to time constraints, the refinanced investments. I'm actually a little more impressed with the second to last column. Again, the percentage increase in value that's buried into these intrinsic within these assets is pretty impressive. And if you just take one of these, take the second, say take the last one down. So 20% increase. Oops, sorry. 20% increase in asset value, that's probably a 40 to 60% increase in equity value. And again, because leverage actually allows equity to obviously be, to be more profitable. So you can read these disclosures. These are track records. I mentioned that we have a lot of reinvestors. And if you look at this in a time when a whole lot of operators out there pause distributions doing capital calls, they're threatening foreclosures. All of our funds have continued to pay out through this entire difficult period. And that's a real complex graph but you can freeze it if you want to when you're watching this and study that or just get a hold of me, we can talk more about it before I land the plane here. I want to talk a little bit about our favorite asset types. We really like self storage. In fact I wrote a book about it published in 2021. I think that was perfect timing when self storage really was hitting its stride. Self storage, there's about 55,000 self storage facilities out there and about two thirds are owned by individual operators. A lot of those are mom and pops and they don't have the knowledge or the desire or the resources to really build these out and make them what they could be. And so acquiring these and doing all the value add work can provide a real profit for investors. The tenants are sticky. I mean think about it. If I'm leasing a fifteen hundred dollar apartment from you Jim, and you raise the rent by 10%, I might leave rather than pay the extra $150 a month and lock myself in for another year of eighteen hundred dollars. But if I'm renting your self storage facility and you are charging me 150 bucks a month, you raise the rent 10%. I'm probably not going to go get a U haul, get my friends together, waste a weekend to move my junk, excuse me, my treasures down the street to save 15 bucks a month. But especially when it's a month to month lease and I can get out anytime and I'm thinking yeah, I'll get down there next week and sort through that stuff. A friend of mine was talking to a doctor in fact and that doctor decided to invest in his self storage deal on the spot. And here's why. He remembered when he was talking to him that he had a self storage unit hitting his credit card for the last seven years and he's more or less forgotten about it. And that's what happens in self storage. I also love that there's a lot of value adds. You can sell items like locks, boxes, tapes, scissors. You can add a cell tower in the, you can add a billboard in the front. You can use that spare swampy land to, you know, gravel and add RV and boat storage. So much you can do in self storage. This is an example of a deal we invested in. My partner Ben was on the ground in beeville, Texas, population 12,000. There were unfortunately these two parents passed away and the five feuding siblings were running this property into the ground. They, they were asking 5 million from a residential real realtor and he bought it for 2.4 million cash. It was appraised at 4.6 million just four months later. And he actually sold it for that about a year after that. What's kind of cool is that he put debt on it for the first time after that reappraisal. So at $4,600,000, 2 million in debt was only 43% loan to value ratio. And that 2.4 million was recycled into other assets in the fund. If I'm going to show you a great deal like that, I should show you our worst deal. This is North End Self Storage in Minnesota. This actually happened, unfortunately, during the George Floyd incident right in that area. The police were deployed with all these other. They were distracted, if you will, with the civil unrest. And our operating partner decided to sell it for a small loss. We basically got a 90% equity multiple on this. We took this $2 million that was invested in that. We were the largest investor in both of those deals, by the way, and just redeployed it into other assets in the fund. And we and our investors didn't miss a beat. And that's one of the benefits. You know, if you'd invested in this deal alone, you wouldn't be very happy. But by investing in a fund again, we didn't even miss a beat. And that money was reinvested into something more profitable. We also like manufactured housing facilities, AKA mobile home parks. It's the only asset type we know of. With increasing demand and decreasing or steady supply, at most every year, there really is an affordable housing crisis. We talked about that earlier. 10,000Americans turn 65 today, but 6 in 10 don't have $10,000 saved for retirement. And that's one of the things that, Jim, that you guys are doing so well to make sure that doesn't happen to any listeners. But many of those folks do have equity in their home. They're willing to trade that in for a manufactured home in a mobile home park that gives them a porch and parking in their own yard and no shared wall with a neighbor. The thing is, with mobile home parks, a lot of the mom and pops don't have the desire or the knowledge and the resources to beautify the park, to really make it as nice as possible for the tenants and to really maximize the performance. You can see here that manufactured housing in this Green street report has virtually no new supply. And it's this way, year in and year out. This is a mobile home park in Louisville, Kentucky. We were on the ground right before COVID I saw my first mask on an Airplane going to Louisville, and it was January of 2020. It was acquired in February for 7.1 million. The goal was to get it up to a $13 million value in three years, but they got an offer on it. Our partner did 15 million in less than a year. So they sold it in about nine or 10 months for $15 million. It's got really high internal rate of return. They're not all this good, trust me. But these are the types of deals that our operating partner is getting because he has eight people in a large room making calls, texts, and emails to tens of thousands of, you know, mom and pop self storage and mobile home park operators, you know, year in and year out. This graphic just kind of shows you the benefit of these more mom and pop type arrangements. So multifamily ownership. We like. We like multifamily, but 93% of the assets are owned by companies who have lots of assets and are more professional. If you go to the left side, self storage, as of a couple of years ago, last time I saw a graph on this, about 3/4 are owned by independent operators, and about half of those are mom and pops mobile home park ownerships. Even more extreme, 80 or 90% of the owners are mom and pop operators. So I made fun of a guy earlier who wrote this book called the Perfect Investment. But our company avoided multifamily for years because of some of the factors. I told you people overpaying by 20 or 30%, using risky leverage, et cetera. But we actually discovered some game changers that allowed us to get back into multifamily. And here's one. Tax abated multifamily. I won't spend a long time on this, but this is a Texas property that got 100% property tax abatement for 99 years. It was acquired for $80 million in one of our funds, and it was appraised the same day for $113 million with the tax abatement. What this does is it creates a substantial margin of safety, which is most important to us since that's our primary goal at Wellings Capital is safety, and then also the potential for strong income and profitable growth. You can see that the equity in this of 26 million or so increased by $33 million according to the appraisal. So pretty cool way to invest in multifamily. And again, this is not something we're offering individually, but we're offering as part of a fund along with other asset types like light industrial. I didn't know this, Jim, but a Huge number of the light industrial properties in the U.S. the industrial parks are actually owned by mom and pop operators, just like self storage, mobile home parks, the way multifamily used to be. And though there are a lot of out there, there's not a lot of focus on this. There's not a lot of new development that's in this arena. A lot of that land is used by multifamily operators. To tell you the truth. This is an example of a property we didn't invest in, but it's quite similar to what we invest in. And that would. You can see here that the net operating income was almost tripled in two and a half years. And the bottom here, the internal rate of return was estimated at 18.9% up front, but it was actually 36.7%. As we're landing the plane here, I want to tell you that this year we've got two fund offerings you can get with us. To learn more about this, we have an income fund. This is for investors seeking predictable income. It's an evergreen fund with liquidity available. There's a $50,000 minimum. It's available for accredited investors only. We have a completely separate growth fund. This is for investors who seek growth and they don't need ongoing income. It's a closed end fund with a seven to ten year hold. And again it's a $50,000 minimum. We did this, we split it into two funds this year because we had a problem. And that problem was we have people growth and we have other people wanting income and they don't always go together real well. And so this is why multiple offerings. Jim, you've been kind enough to refer hundreds of investors to Wellings capital and about 150 have invested with us. Sam Scroggins is one. Alan Celane is another one. They've got very, very nice things to say about Wellings Capital. John Griffin is one. He says their stringent due diligence helps my investment doll hard for me and puts my mind at ease. Evan Wilson's a retired orthodontist who invested with us. He's got really nice things to say about me. And I appreciate that all these guys love us, but not everybody does. And you may be somebody who doesn't. There's a lot of reasons not to invest with Wellings Capital. One is if you need a liquid investment, run away. Don't invest with us because it's not liquid. You shouldn't invest in real estate in general if you need liquidity. If you want a shorter hold time Or a longer hold time, we might not have what you need. If you love control, you shouldn't invest passively in commercial real estate. If you want to file your tax return on the early side, you won't like us. If you're concerned about filing in multiple states, talk to us about that. We might have a solution for you. And if you're investing with an Iraq, just like anything else that has debt, you may be subject to ubit. Before we wrap up, I want to bring up this unbelievably. About 200 years after slavery was outlawed in the UK and almost 200 after the US we've got a situation where there are more slaves, possibly up to $50 million in the world. 50 million people, what am I saying? People traded for dollars than ever before. If you took the record profits, amazingly of ExxonMobil, Nike and Walmart, added those record profits together and tripled that number, you come up with the approximate annual profits of human trafficking. We didn't know what to do about that, but we actually did the same thing we do for commercial real estate. We did due diligence. We found a partner we really loved and we have raised, influenced and donated about $850,000 to them since 2021. We would invite you to learn more at that website there. Wellingscapital.com social mission or better yet, just go right to AIM, our partner aimfree.org wellings and you can donate there. Of course they get all that money and it goes straight to Cambodia. If you want to schedule a follow up us, you can do that here. The best way to get more information is at this bottom link. Wellingscapital.com Whitecoatinvestor that's about it for me Jim. You got any questions?

Okay, let's move into the Q and A period and if you can't remember all the URLs whitecoatinvestor.com wellings all you gotta remember is Wellings and put it on the end of that URL and we'll get you to the same place. All right, well first thing, Paul, let's talk. Let's have you peer into your crystal ball for just a moment. And I understand most crystal balls are at least partially cloudy. Mine always seems to be very cloudy. But peering into there, what real estate sub asset classes seem most attractive to you in 2025? If you're thinking about multifamily and heavy industrial, light industrial and self storage, et cetera, what seems attractive to you?

You know Warren Buffett, Howard Marks, Charlie Munger. Guys, I really love. They talk about the importance of investing regardless of what the crystal ball says. And so we like to look for issues we can control versus those we can't. We can't control interest rates, we can't control an economic crash, we can't control a war in the Middle East. But we can look at fundamentals and see where they really stand. Multifamily, if it doesn't get overheated again, would be a great place to invest because of the supply and demand inequity I mentioned. But I can tell you that even if things do get bad in the mobile home park space, we have never seen a bad year. And we've looked at back for decades in this asset type. It was an under loved, underappreciated asset type. The supply and demand is just always out of whack and they're not building any more mobile home parks to speak of. So that's certainly one that I always like.

Now, office has been real estate's whipping boy for the last five to 10 years as more and more people work from home. It seems like there's been a little bit of reversal of that trend in the last year or two as people are expecting, you know, employees come back to work. But what do you think? Is office still. Office still deserve its miserable reputation it's acquired the last few years.

You know, we don't invest in office or hotels. I'm not saying that they shouldn't be invested in, but I will tell you that whenever someone says something is dead, like they said in 2020 and 2021, as people would never return to work, we're finding that that's not totally true in government and it and lots of different companies, they are returning to work. Office is coming back. In fact, certain office assets are doing as well as they've ever done. Not something I would invest in, but it is certainly doing a lot better than I ever expected it would be within five years of COVID Now I.

Think there's a lot of people out there that are not familiar with the term light industrial. Tell us what a light industrial investment looks like.

So if you look at along the freeway in your town, you might see an industrial park. This is a place that might have a wine vault, it might have a church office, it might have a little manufacturing facility, it might have a sales force. There's dozens of different types of companies that rent these flex spaces. They can be anywhere from 3,000 to, let's say 30,000 square feet per space. Widely diversified and they're in very Very high demand and I think with the current economy they'll be in even higher demand in 2025. These are again, they can be office, they can be warehouse, they can be shipping, they can be light manufacturing, all under the same roof.

Very, very flexible space.

Yeah.

Now people aren't moving as much the last year or two due to interest rates being higher and having to swap a 3% mortgage for a 7% mortgage as well as housing prices continuing to be high and climb due to supply shortages. How is that affecting your self storage returns? With people not moving, are they not putting their stuff into self storage?

It's absolutely affecting self storage. You guys probably all notice that if you're anywhere near a medium sized to large sized city, there are self storage that have popped up everywhere in the last decade. So you've got an oversupply problem, first of all. Secondly, you've got a big boom from COVID that's certainly slowed down since. And third, you've got this lack of people moving. And this is why I didn't mention this very clearly, but Wellings Capital loves to invest in tertiary or even smaller than tertiary markets. Imagine investing in ishpeming Michigan, population of a few thousand. We have a very large self storage facility there. That's absolutely crushing it. Beeville, Texas, I mentioned that one. Other small towns like Grand Junction, Colorado, when you invest in tertiary markets and you're getting these assets that are extremely poorly managed. I can tell you stories of homeless people in the one in Las Vegas where my operating partner acquired it, kicked out the homeless people. It's illegal and unsafe for them to live there anyway and double, basically double the income in a year of that facility when you get deals like that. The macroeconomic factors you mentioned, Jim, don't play as big a role.

When you read the. There's a list on the Wellings website that talks about your priorities. One of those is diversification over simplification. Tell us about the downsides of that diversification.

The downsides of diversification? Well, I mean one would be if you have, you know, like if you would have just invested in that mobile home park in Louisville, you would have had an unbelievable return, an unbelievable great outcome. If you would have just invested in the $2 million self storage place in St. Paul, Minnesota, you'd had a terrible outcome. Of course they buffer each other. So, you know, the great ones are buffered by the lesser ones. Another downside I mentioned, and I want to be real clear about that, is we have investors who don't really like the idea of Filing taxes in multiple states. And I get that it's a pain. I mean it takes me five minutes a year to do that. But it's a pain for the CPA and it does cost extra money. So that diversification does come with a price.

Yeah, yeah, I think that's probably the main one for passive private real estate investors is if the fund's in multiple states, at least by the end of the fund you're going to be filing in those states.

Right.

Okay. Let's talk about your approach to debt in the past as well as what you anticipate in the future. Now we've talked about some of the dangers of short term variable yield debt, but what's been the approach of Wellings to that?

We really like longer term fixed rate debt. So that's one of the big vetting issues we look at when we vet an operating partner. We like 5, 7, 10 year debt, 12 year debt, some of them even have longer. And we like fixed rate debt. Some of three or four of our assets were acquired with floating rate debt that had a cap and they were often acquired at real high rates. In other words, they penciled some of the industrial assets we have penciled at an 8.5% interest rate. They were acquired there. And so honestly that floating rate will probably end up working in our favor. But overall we really like low loan to values and low risk debt, which.

Obviously has its cost in a boom kind of environment and you don't appreciate it quite as much until rates go up 4% in a year.

Right.

Now one of the things I really like about Wellings is a phrase you use and you used it in this presentation. Low to mid teens tax shielded yield. And there's lots of people out there promising the moon when it comes to returns. Tell us why this has been your approach.

Yeah, I mean you can look at the track record there and see you can scratch your head maybe and say, wait a minute, what about all these high returning individual assets? We don't want to promise that we would rather, you know, target low to mid teens, you know, 13, 16, 13 to 15% or so. And you know, hopefully though there's no guarantee we'll overperform. One of the things we've seen, you know, I know I don't look it, but I'm 61 and I've been around a while and I've seen that no matter how good a plan looks, nobody wakes up in the morning with a plan to destroy their portfolio. But it happens. And so no matter how good an individual Deal looks, stuff goes wrong and we can try and hope we can get in the 20% plus return range, but it's not likely and we certainly don't want to promise that kind of return.

Well, it was interesting to see what's coming out in 2025. One of your funds is evergreen. That hasn't been your approach in the past. Your funds have been you collect the money and invest in the assets and then in a few years sell the assets and return the money to the investors. Tell us a little bit about the decision to add an evergreen fund as well as what you see as the upsides and downsides of evergreen and non evergreen funds.

Yeah, we did a survey of our investors and we had a number of investors say they wish they had liquidity. In fact, people, some of our investors have invested in some of our short term sidecar deals and we realized there really is a demand. People want that little bit of control. They don't have much control in a passive investment, but they really like liquidity. And the way to do that was to offer an evergreen fund. We also have people who have a Warren Buffett mindset who said my ideal holding time is forever and they really like that longer term strategy. So we decided to put together an evergreen fund to allow our investors to have that liquidity, to have a shorter term if they want it, or a longer term hold. It gives them that flexibility.

Yeah. What are the downsides though? I mean, who wouldn't want liquidity if there was no cost to it? Right. What are the downsides to the investors in the fund? I mean, there's got to be a little bit of cash to meet those redemptions. Right. So there's some cash drag. And does it limit what investments you feel like you can put into the fund? Because you know, if everyone decides they want to exercise their liquidity and not wait the time it takes for that investment to pay off.

Yeah, there are limitations on it. We have the right to refuse if there is a mad run on the bank, if you will, just like every fund has the ability to say no. But I think one of the downsides is the investors typically don't get the proportional appreciation if they pull out early because it's really hard to know those assets I showed you on the full cycle track record. You really can't see that those returns are going to be what they are until about the time they sell. And so if someone pulls out four years into a seven year deal, they're probably going to get shortchanged on that growth.

Does it Hurt the other investors in the fund though, to have to meet that person's need for liquidity.

The reason I don't think so is we always plan to be raising money. And so if Somebody says on January 10th that they want out on April 10th, 90 days, it's pretty likely if that's $100,000 investor, that we'll have another $100,000 come in in that month. We raise millions a month, in fact. And so it's. I don't think it should.

Now, Wellings mostly offers funds via some of the sidecar investments. You're essentially able to buy a syndication into one or two or three properties or whatever. What do you think somebody needs to look like as an investor to want to buy syndications directly versus taking a fund approach?

Yeah, I think it would be people. We've had only 10 year funds up to now, Jim, and a lot of folks like the idea of a three to four year fund. Some of these investors might be older, they might have had other investments that went really well in three to four years. They want to do that again. I think that a lot of people got jaded during the 20 teens and they had such great returns that they were able to. They feel like they want that again. So they like the shorter hold time. They also like to see, feel and touch the asset. So our current offering is a three asset, multifamily sidecar. Investors can go look at those exact returns, the exact underwriting, you know, the income, the rents, the rent rolls, et cetera. They can look right at it. Rather than a fund where it's sort of vague and they wonder what we're going to invest in in the coming years.

So do you think that is somebody with more real estate experience that ought to be looking at those individual investments that feels adequate to take another look at that underwriting, or just somebody that wants money back in three years instead of 10?

I don't think it necessarily has to be somebody with more experience. I would think it's somebody who wants three years instead of 10. And they wanted to be able to look at the individual underwriting. I don't think, I mean, if it passes our due diligence, even if it's, you know, and whether it's in a fund or a sidecar, it's gotta be, you know, in our mind at least a pretty good deal and a great operator. So I don't think it's gonna be that much different in terms of whether it's in a sidecar or fund.

Now, your approach at Wellings has been to partner with operators, not to run the investments yourself.

Right.

Now, obviously that means an extra layer of fees in exchange for your due dilig and diversification. What do you see as the risks of that model where you're not the operator of these investments?

Yeah. So one risk is though we do everything we can to do criminal checks, background checks, et cetera. The number one risk for us and our investors, I think probably for any passive investor in any deal is fraud because again, nobody wakes up in the morning thinking, I'm going to mess this up. It's possible that one of our operating partners would somehow lose control of their bank account and, you know, maybe a controller or somebody else that they just hired would run off to South America with the money. We do a whole lot of due diligence on their controls and everything else to make sure that doesn't happen. But I think that is the number one risk of having a diversified fund. And I think that's again, I think it's probably everybody's top risk. If you look at the couple fraudulent deals that have been pretty famous in the multi or, excuse me, in the passive commercial real estate realm the last few years, I don't think any of them started out that way. Somebody started doing whatever they were doing later that became a problem. Awesome.

If you're looking for more information about Wellings Capital, you can get that@whitecoatinvestor.com Wellings Paul, what have we not talked about today that you think white coat investors really ought to know about real estate investing in general and about Wellings in particular?

I think that people should really think hard about why so many people ran. So many of us ran after these shiny objects in the last decade. And again, Jim, I don't think you did that. I think you guarded. You really did a great job protecting people against that. But I think a lot of it was fomo. Fear of missing out. And I think people should take a different approach. I think they should take the approach of fomo, which is fear of messing up. I spent years as an early investor. I wasn't really an investor at all. I was a speculator. When I had a few million dollars from selling my company 26 years ago, I speculated a lot and I made some money. I lost a lot of money and I lost a lot of sleep. And I found out later that the fear of missing out was a real problem. It was basically a recipe for failure on my part. Now we have a fear of messing up and it's led to a third acronym which I call Jomo. So FOMO led to fomu, led to Jomo for me. And that's the joy of missing out. I can tell you that there are so many deals that we did due diligence on. We thought we would invest in some of them made a ton of money and there was some regret there. But honestly, we knew we did the right thing. We stuck with our principles. And some of those other deals were colossal failures. And some of those two of them were some of the big frauds that we had done due diligence on and hurt a lot of people in the last several years. So I would recommend that investors avoid fomo. They go for fomo.

Thank you very much, Paul, and thank you for your time today. Appreciate it.

Thanks, Jim. The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.