The BRRRR Formula Has Changed (It Still Makes You Rich) | AMA (Ask Meyer Anything)

If you're struggling to move forward towards financial freedom, keep listening. We're answering your questions today.

What's up, everyone? It's Dave Meyer, head of real estate investing at BiggerPockets, joined by Henry Washington today. And we're diving back into the BiggerPockets forums to help the people out with a little Q and A. We're going to touch on how to make a BRRRR work in today's environment when it's the right time to scale up from residential to multifamily investing, how to invest at a very young age, and much more. Henry, how's it going?

What's going on? Dave, happy to be here.

Good. Well, we've got some great questions. A couple of them I think are right up your alley, so let's jump in. But first, I want to remind all of our listeners that these questions come right from the BiggerPockets forums. You go to BiggerPockets.com forums where you can ask 3 million BiggerPockets members your questions, and they might just get picked to be answered here on this podcast. All right, Henry. Our first question today comes from David in Houston. He asks for those focused on the BRRRR strategy. What strategies are using to find deals in a market with rising interest rates and fluctuating property values? Are you having more success sourcing off market properties, or do you focus on distressed opportunities through agents or wholesalers? And with lenders tightening up, are you still able to generate your desired profit when you refinance? This one, like I said, seems right up your alley. You do a lot of renovation, value add investing. Henry, give us some insight into how you're managing it these days.

Yeah, it was like 17 questions in one.

Yeah, it was. Yes, we will be here all day. Let's start with the first one. What strategies are you using to find deals?

We're mostly sourcing our deals still through direct mail and some other channels. We use a lot of direct mail. We do some pay per click running AdWords campaigns that allow people who are looking for us to be able to find us easier. But to answer his question, what you really just need to do is figure out what you're willing to spend to find deals. We all spend something to find deals, but you're going to spend time or you're going to spend money. And so he needs to take an inventory of what he has. How much time does he have to find deals, and how much money does he have to find deals? If he's got money and not time, then what's the strategy, you can reach the most amount of people with the least amount of dollars. Typically that's going to be direct mail or some sort of cold calling service if you have time but not money. Making offers on the MLS is a great strategy, but you're going to spend time both looking through a ton of properties, analyzing a ton of properties and then making a ton of offers. And then it's not just making the offers, but people forget, really takes up the time is the follow up is you having to check back on that list every week and see, okay, I reached out to these many people, made these many offers. Now I need to follow up and see, did they counter? Did they not counter? Can I send a second offer? What kind of feedback did I get? So it's keeping up with all that that's takes a lot of time, that and analyzing all the deals so that you can make the offers. So it's just a matter of figuring out what do you have to spend time or money and then pick a strategy that fits the budget you have.

Yeah, totally agree. Because for me it hasn't changed either. I still primarily get deals from agents, pocket listings. Sometimes they bring me off market deals, but it's not like I'm going out and sourcing these off market deals myself. But it costs me time. Not in that it's like I'm sitting at my computer all day or doing anything, but I just get less deals. You know, I, I don't have as much volume as Henry does. Henry is going out and being much more proactive about that and that hasn't really changed. This is sort of how I've always done it. Sounds like Henry's kind of doing what he's always done. And yeah, like there are less deals on the market today if you look at inventory than there was four or five years ago. But it's actually starting to go up. And anecdotally I'm already starting to see more deals and deals sit on the market longer. And just as a reminder, this question came in the context of brrr. But I think what Henry and I are both saying applies to any kind of deal finding right now. It doesn't. It's not strategy specific. And then it said, and with lenders tightening up, are you still able to generate your desired profit when you refinance?

No.

Yeah.

Yeah.

What's your desired profit? Mine's a million dollars on every deal and I can't generate it. Well, tell me more.

No, I'm going through several refinances right now of properties and some of them we're having to leave cash in them more than we expected because rates did not go down like we hoped to when we bought them a year or two years ago. Some of them we are having to bring cash to the table in order to refinance them.

Yeah.

Typically that is because when I bought it, we didn't put any cash down, so we were able to buy them without having to put any capital into it. And since now that we are refinancing them at rates that aren't as low as we had expected when we underwrote them, we are then having to put the money that we didn't put down down now to refinance it. Which isn't the end of the world.

No. I guess for me, this question about BRRR is really about expectations. And I was actually interviewing another investor about this yesterday and he admitted that he sort of became obsessed with this idea of a perfect BRRRR where you can pull out 100% of your equity. And I've just been trying to tell people all year about the fact that when that was going on, when the BRRRR book came out from biggerpockets, that was a very unique time where interest rates were super low and property values were appreciating. Burr still works. I like, I just, I don't know how else to say it. It still works if you have appropriate expectations. If your expectations are that I'm going to be able to continuously buy property and put zero money into any of them, you're going to be waiting a long time. But if your expectation is, hey, I can build tons of equity and hopefully pull some of my equity out during a brrrr, you could probably still do that.

Yep. You know, some real life examples. I have plenty of investor friends who are doing brrrrs right now and pulling. Why? Because they bought some phenomenal deal.

Yeah.

At such a cheap price that they're able to do it. I also have investor friends who are burring, myself included, who are not pulling nearly as much out as they expected to. And that's okay. That's still a burr.

Yeah.

When I taught the BRRRR Boot Camp for bigger pockets, the first lesson of the BRRRR Boot Camp was to change what you think about brrrr deals and your expectations. Because even if you can pull out one fourth of the money that you put into it, like, that's still awesome.

It's great.

It's still a burr. You don't have to do a full burr.

The basic idea behind Burr is Accelerating your scaling, right? You're taking money and rather than leaving it as equity in an existing deal, pulling it out and applying it to a future deal, that is still true even if it's not 100% of your deals. And Henry's right, a perfect Burr is still possible, but they're going to be rare. And I actually asked this question to the investor yesterday. I asked him straight up, I was like, do you think you would have been better off just doing a couple regular deals instead of waiting for this perfect sort of Goldilocks scenario? And he was like, yeah, I definitely should have just done a couple of deals where I pulled less money out. And obviously it's going to be different for everyone's situation. But I think that rung true for me that doing smaller deals more frequently is also a very effective way to scale and perhaps more effective than waiting for some perfect scenario.

You can also be a little more open minded or realistic about your time frame when you do this as well. Like, I'm refinancing two properties right now that I bought three years ago and I'm refinancing them and I'm pulling cash out of both of them. Yep, I'm pulling about $50,000 out. I paid no money down to buy these properties and now a few years later, after they've been cash flowing well, I'm able to refinance them, pull some money out. They still cash flow after I pull money out. It's a good situation for me. So totally it didn't happen in just, you know, six to 12 months where I burned it. I had to wait a few years, but the opportunity is there. You just have to rethink what a bird deal looks like. It's not the same as it was.

I'm doing the same exact thing. I've renovated property. I have some equity sitting in this deal that I can pull out, but because I'm not as aggressive as deal finding, I don't have a deal to put it into right now. I'm looking, I'm waiting and I'll refinance it when I'm ready, like when I need the money. I'm just going to enjoy the higher cash flow by keeping that equity right now and then I'll refinance it when I found another deal. Before we move on to our second question, just want to call out that this segment is brought to you by Resimply the all in one CRM built for real estate investors. Automate your marketing Skip trace for free. Send direct mail and connect with Your leads all in one place. Head over to resimpli.com biggerpockets now to start your free trial and get 50% off your first month. All right, everyone, stick with us. We'll be right back for more forum questions.

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Welcome Back to the BiggerPockets podcast. I am here with Henry. We're answering your questions. We just talked about. Brrr. Next question comes from Damien in Hartford, Connecticut. Damien says, I'm a rookie investor with one long term rental deal under my belt that is cash flowing. More than $1,000. That's great. I hope that means $1,000 a month. As I take in as much content as possible from listening to Real Estate Podcast and the Rookie Podcast, I feel drawn to building multi families and renting them out. I have a W2 that I'm passionate about, so I feel this process will allow me to make sound decisions as opposed to quick fix and flips. I also have a family friend who's a GC building multifamily homes. I'm interested in any advice on a build to rent strategy. Okay, there's. There's a lot here. We got some juicy questions today. How about this? Anytime I hear rookie and building multifamily in the same sentence, I am scared.

I was trying to figure out a nice way to say that.

I'll just say it. It's not that it's a bad thought process. Not at all. But I. I am 15 years into my real estate investing career and I am scared to build multifamily rentals. Maybe I'm too timid. I don't know. I'm somewhat of a conservative investor. But listen, the way I always recommend to people about scaling is to do it incrementally. I think if you've bought a single family, you can move to a duplex or you can buy another single family in a new market. Maybe you could Flip in your existing market, like change one of your variables. What always worries me is when you change a lot of variables at once. So you're going from buying existing homes to developing. You're going from a single rental to a multifamily home. You're talking about going from stabilized assets to build to rent. There are a lot of different things, a lot of things to learn. And my recommendation is, if this is your goal, build to rent multifamily. That's great. Personally, what I would do is try and get there over the course of four or five deals by making incremental steps towards this. You know, you're probably going to need 10 new skills between now and then. Try and learn two of those skills on your next deal, then two more of your skills on the subsequent deal, then two more of those skills and build your way up to this. Because this is a big swing. Nothing wrong with that. But I personally would recommend trying to get there a little slower.

And please don't take this advice as us telling you you're not capable of doing this. It has nothing to do with that. You are probably absolutely capable of getting this done. But what you have to consider are what is the risk if I fail? Because it's a real possibility and there's a lot of risk in development.

Experienced developers fail.

Yes. There's a lot of upfront cost with developing that you just spend and do not know if you'll get the green light on your project and you don't hold the cards that allow you to pull this off. Somebody else, several somebody else's have to sign off and agree that you get to do what you want to do.

A lot of opinionated city council members get to decide what goes on here.

Yes, yes. And so I agree with you from the perspective of like, there's a lot of skills you need to build to pull this off successfully. Could you pull it off successfully on your first deal? Yeah, you absolutely could. The one thing in this question that I like is you said you have an experienced developer that you have a relationship with. And so what I would tell you to do is to go get with them and figure out how to be someone that can either job shadow, add value in some way to be a part of a project that they're working on. Can you take a minority partnership stake into a deal that they're working on. Can you bring them a deal and then partner on them with them, Bring them a land deal or something and then partner on it? Like, don't take on all that risk. At first without some experience, but after you've got some experience, then maybe go take it on on your own. Or maybe go try to build a single family home. It's a lot less risky to do a single family new construction build. They're pretty easy to get approved in the right areas. The land cost is pretty low depending on where you're buying the land. Like, it's a lot less risky, but you'll get all of the same experience and skill sets that you need to go do a larger project. Look, I am an experienced investor. I've done hundreds of real estate deals. There have been at least three times that I've had a piece of land that I was going to build multifamily on and started the process and just went, nah.

And just sold the land to an experienced developer.

That's a good business, actually. I like that.

And I made money every time I did it. I made money every time I did it. It was a lot easier. Easier. And I'm not saying, like, I could do it. I could. I could do it. But the amount of time and effort that it was going to take and how much of that time and effort it would take away from me doing the things I'm really good at just didn't make sense for me. But I know enough to know that it's not easy. I know enough to know that you can spend a lot of money and not get a payday for it.

Yeah.

And so just be careful. And if you have somebody experienced that you can work with, find a way to work with them on a deal. Every time I venture into a new real estate niche, I didn't do it on my own. I found somebody who. That's what they do. That's what they focus on. And I found a way to add value to them, to partner with them. That's how I bought my mobile home park. That's how I bought my first commercial real estate deal. I did not just go buy them on my own. I went into them with partners and I went into them with such good deals that if I had to get out, if I had to turn around and sell the asset as it sat, I was going to make money. So I limited my risk. So just be careful.

Yeah. The other thing I would say is that built to rent sounds great, but you need to think about the liquidity of this. Like, a lot of the times the way this works is the person who builds it and develops it is not the person who holds onto it and operates it because they need the cash back. There's so much effort and time put into developing the property. They sell it to an operator and then they go on and develop it. They the development of build to rent and the operation of it are often different businesses. And so I think you need to sort of think a little bit about in which business you want to run there. All right, let's move on to question number three. Comes from Craig who said, I'm starting to see the light. This deal would be my first deal focusing on equity gain and appreciation. All right, so Craig's moving on from a cash flow obsession. It sounds like he says it's a 32 house I found off market for 175. Mechanicals are all less than 5 years old, so it needs less than 15,000 to be in excellent shape. I'd be 190k all in with 25 down on a conventional loan saving 15 for repairs, vacancy and capex. I would cash flow 128 per month according to the BP calculator and comps. So I guess the ARV would be 235. I have 5 rentals and 128 bucks per month would be my lowest cash flow. But I'm focusing on the 30 grand plus in equity. Would you do this deal?

Me now? Yes. Me just starting out, probably not.

Say more about that.

So if you're a brand new investor and you're just starting out, cash flow is important.

Yeah.

Because it's your safety net, it's how you protect yourself in the event that something goes wrong. And so that's a big chunk of change that 25% down to only be getting 100 and something bucks in cash flow. I mean one thing breaks and your cash flow's gone for the year. Me, now me today, like buying a deal where you're walking into $30,000 of equity where you're going to be able to cash flow it and it'll be a performing property, which means I can do a cost segregation study on it and accelerate the depreciation on that asset, which will save me another 20 to 25 to 30 grand on my tax bill that year. So I've got equity, I've got cash flow, I've got appreciation, I've got debt pay down through my tenant paying the mortgage. That's a win all day long in my book now because I'm less concerned about the cash flow now that I have a performing portfolio of cash flowing assets.

I would say that for me personally, I would probably do this deal. I'm just doing a little bit of the math in my head, and I agree with Henry, like I would do it now, but I would also consider doing it as Craig said that it's his fifth deal. So I would consider it if I were Craig too. So let me just do a couple of the numbers here. This deal, roughly, I'm just estimating based on what we know would get him about a 3.3% cash on cash return. Now that's not the most exciting cash flow in the world, but if you've been listening to the show this year, I've been preaching this idea of upside and finding deals that make sense today but have some upside that can really generate better returns in the future. So if this deal was like in a just okay area, rents were probably not going to grow. It's not in a great market, I wouldn't do it. But if this is a good market that rents are probably going to increase over the next couple of years, maybe there's some good zoning, maybe you're in the path of progress. Like then I would consider this deal because as long as you're holding back enough for repairs, vacancies, capex, which you might need to do a little bit more than 15% and it's going to grow in the future. Like I think this could be a pretty solid deal right now.

No, I think this is a decent one. Yeah, I think it's a decent, just base hit real estate deal done the old fashioned way. Put some money down, get a conventional loan, make some cash flow, have an asset that doesn't take a ton of maintenance. I mean, that's, that's what you look for.

Exactly. He's got five of these. So if this is a six, you buy five more of these over the next couple of years. And this kind of deal is not that hard to find. You own 10 of these, you start paying them down, you pay them off. In 15 years, you're retired. Like this is old fashioned financial freedom.

In 10 years, he'll look at this deal and feel like a genius.

Exactly. Yeah. Yeah. And I think that's why. Yeah, people overthink these things. But I agree with you. Like if this was my very first deal, I would want a bigger cushion. Not because I needed more cash flow, but because you're not as good as underwriting and you just don't know how much things cost. And you can, you can learn and plan as much as you want. And I hope you look at all the resources we have on biggerpockets, but you're just gonna, you're gonna get a little bit wrong. And so you need a bigger cushion. You need the 250 bucks, 300 bucks a month just in case. That would be my recommendation. So I think Henry and I agree on this one. All right, thanks for your question, Craig. Good luck to you on landing that deal. We do have to take a quick break, but we'll be right back with more forum questions.

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Welcome back to the podcast here, with Henry answering your questions. Next one comes from Sean Sean says I live on Long Island. That's in New York. If you don't know an expensive market where breaking even on a property isn't really possible. I'm 18 and currently living at home with low expenses. Should I buy a duplex as a house hack and cover the negative cash flow to start building equity? Or should I take advantage of my low living costs and invest out of state in a more affordable market? Home prices on Long island depreciate quickly, so I worry that waiting could make it even harder to afford a home when I eventually move out. What would you do in my situation? I have a lot of questions, but where? Where would you go with this one?

I do too. This may not be the popular answer. I don't know that I would buy anything. Yeah, I would go. I would go get a job in the real estate field somewhere. Maybe you're working for an agent or an appraiser or a contractor, but something where you're going to learn part of the business and just stack as much money as you can while you're living at home. Yeah, and then go buy yourself a duplex and house hack it like when you have to move out. But I don't know that I would give up the free living cost of living expense because that's typically everybody's highest bill each month and you don't have that. So just go try to get the highest paying job you can and stack as much money as you can. Pretend you have to pay $2,000 rent every month and just stick that money away.

Yep. Honestly, I would do the same thing. And I know that this is probably not going to be a popular opinion, but I get the sentiment that like oh, you see properties going up in value and you want to get in now, you know, get in on that, which I get. I do personally think we're going to have not negative, but relatively slower appreciation. So that's one thing. The other thing is that real estate is leveraged. So just think about the math here for a second. Let's just imagine that the house hack that you're going to do, Sean, is $500,000 today. That means if you put 5% down, which is a solid amount, is $25,000, you would need to put down, if over the next year or two properties, let's say they went up a lot, 10%, that would be a pretty big increase in my opinion, to 550,000. The amount you would have to put down if you're putting 5% down, goes to 27,500. So even though the property price went up by that amount and you would miss out on some appreciation, the affordability problem is probably not going to be that big because you only need to put another $2,500 down. Meanwhile, as Henry said, if you're saving $2,000 per month over the next two years, that's 50 grand you're saving. So that makes up for the appreciation. And it's just a more conservative way to go. It's a safer thing because when you go and purchase your property, one, you can choose to put more money down, you could pay less interest and you just have more cash reserves, or you could buy a house hack and then quickly follow on with another property. It would just give you a better, stronger financial foundation. To me, real estate is just a long term game. And I know you want to get into the market as soon as possible, but I think building the strong financial foundation is what gives you the staying power. Right? You can rush into it and if you're not ready and have a strong financial position, you might need to sell that property and then you'll get out of it after two or three years and then you're starting over. If you wait a year or two and build a really strong cushion, you're going to be in an amazing position to be in real estate for 15 years. You're probably going to be financially free by 35 or 40. Like, I would just recommend taking that more patient approach personally.

Just rethink in your brain what it means to be an investor. Like you're thinking, I want to be an investor and get in the game now. But I would tell you that positioning yourself by staying at home and then saving as much as you can per month, pretending you have a mortgage to pay for the next two years and just paying yourself that money. That is an investor you are investing totally. You just haven't bought the property yet. So just reshape what you're thinking about becoming an investor. You already are one by doing that.

Love that.

That's great advice. Let's move on to our last question for the day, which comes from a BiggerPockets member named Kylie. She asks, do any of you invest in small towns? I'm thinking a small town that has major stores and isn't too far from a big city could be a great, great place for me to start. How do I comp properties in an area without many sales? And what else should I know about small town investing? Now normally, Henry, I would make fun of you for Arkansas being a small town, but it's just not. So do you, I know you, you have like a couple auxiliary properties outside of northwest Arkansas. Are any of them in small towns?

Yeah, yeah. Joplin, Missouri, Pittsburgh, Kansas.

All right. And what do you think about it?

I like it. I like it. Cash flow, towns appreciation is slow. Cash flow is great because the job market and the economy is great. And so those are the things you would need to focus on is really the answer to your question. If this were me, I would define what I feel like small town is, right?

Yeah.

And then once you have that definition, you can literally ask chat GPT this stuff. Now you don't have to like go searching all over the place anymore, but you can get a list of towns with that population density you're looking for. And then what I would be looking for is what's the economy like? They're like what drives the economy and is there population growth? Because if you've got a small town where population is growing, where there are jobs that people want and people are moving to that area, well, you can pretty much expect that property values are going to continue to go up in that area and rents are going to continue to go up in that area. And so it's just a matter of you need to figure out what, what other economic factors are important to you and then find the market that has all of those economic factors and then you can start looking for properties in those areas.

I only own one property in a small town, but I've done a lot of research into this, so just take this with a grain of salt. A lot of this is sort of like academic and not from experience, but I think that small town investing can actually be really lucrative. But as Henry said, there is a broad, broad range of what it means to be a small town. We saw a across the board universal appreciation and acceleration of prices in the U.S. for many, many years. And I think it's going to slow down. I think it's going to particularly slow down in a lot of these rural areas that were really beneficiaries of COVID and their work remote policy. You're already starting to see data, you see reports about this that a lot of these cities that, that boomed during COVID are already losing population, home prices are going down, rents are going down. And so just be careful about that. I think, you know, just looking at the last five years of data is not sufficient. Look at what happened in from 2000 to now and you know, try and omit the data from the last five years. And if the numbers are still good, if the job growth was good, if there was rent growth and appreciation 15 years ago, 10 years ago, then it might be a good idea. But I just, just, I caution people to not assume that recent performance is going to be continued.

I would also say it's cool to be able to understand how to do a lot of this research yourself. It's also cool to know that you don't have to because there are a lot of companies who pay people a lot of money to do this kind of research totally for the company and you can leverage that research to help you pick where you should invest. So here's an example. I have an investor friend, he likes to buy properties in air quote, small towns that have minor league baseball teams. Why not? Because he likes minor league baseball.

It is pretty fun though, to go to a minor league baseball game.

But he does it because the minor league baseball teams have done the analysis to figure out what cities have the population and economy to support a minor league baseball team. Team. And so he figured he did enough research to know that their economics and demographic data is my same target market. So I'm gonna buy where they're putting teams. If they're investing millions and sometimes billions of dollars, I can go and buy some homes in that area because I can trust that research. It fits what I'm looking for, right? So think about what companies might be moving to an area you think about, right? Like there's another investor I talked to that said they like to buy properties where they're building new Chick Fil A's, because if you think about Chick Fil A only builds in the path of progress. And so they look for where they're putting new Chick Fil A's. And then they think, what radius around those places? Could I buy properties?

Yeah, that makes a lot of sense.

Other things that you can do. I've talked about this on, on episodes in the past. You can buy shares of stores like Lowe's, Home Depot, and Menards. One share. Just buy one share. And when you buy one share, you now get a shareholder packet. When they send them out in the shareholder packets, they have information about where they're going to go and build new stores. What's cool about Lowe's and Home Depots and Menards and all these stores is that they get offered tax breaks and tax incentives to go and open up stores in areas where new development is coming so that the developers have a place where they can go get and source material, materials. And so understanding where these stores are opening up new stores will help you understand where they're going to build new infrastructure, where they're going to build new homes, where they're going to build up different parts of a city. And you can use that research to help you figure out what smallish towns that are on the rise might be the one next up so you don't have to do it all yourself. Yeah.

And I should just say, on a philosophical standpoint, the good thing about small town investing that I really, like, make is like, I've pivoted to sort of looking a lot recently at small cities because I just think there's less competition from other investors. And as someone who's investing from out of state and doesn't do the like, aggressive deal finding that Henry does, it's better to be in a market that's kind of just like chugging along and you can sort of be a big fish in a small pond rather than the vice versa. You know, on paper, I love Charlotte. You know, great city. I have no advantage there. You know, I, I, I'm not going to be able to find the best deals there, but some of the markets in the Midwest that I'm found that have strong growth, have strong fundamentals, and like, I can come in and be an aggressive buyer in that market. That's really valuable.

Yeah. You buy enough properties in the small town, then you can be like the mayor or something.

Yeah, it's like Foursquare back in the day. You check in enough times.

Updating myself. Wow.

All right, well, this was a lot of fun. Henry, thank you so much for joining me, answering these questions today. It's been a good time.

It's been great. Thank you.

All right, and thank you all so much. For submitting these questions again. If you want any of your questions answered either by Henry or I or the 3 million plus members of the BiggerPockets community, go to biggerpockets.com forums and ask your question questions there. Thank you all so much for listening. We'll see you again for another episode of the Bigger Pockets Podcast very soon. Thank you all for listening to the Bigger Pockets Real Estate Podcast. Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify or any other podcast platform. Our new episodes come out Monday, Wednesday and Friday. I'm the host and executive producer of the show, Dave Meyer. The show is produced by Ian K, Copywriting is by Calico, content and editing is by Exodus Media. If you'd like to learn more about real estate investing or to sign up for our free newsletter, please visit www.biggerpockets.com. the content of this podcast is for informational purposes only. All host and participant opinions are their own. Investment in any asset, real estate included, involves risk, so use your best judgment and consult with qualified advisors before investing. You should only risk capital you can afford to lose. And remember, past performance is not indicative of future results. BiggerPockets LLC disclaims all liability for direct, indirect, consequential or other damages arising from a reliance on information presented in this podcast.