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Get ready to find your recipe for a successful real estate lifestyle from America's top experts here at Greenlight REI with your host, Lance Edwards. Well, hello everyone. Hi. This is Lance Edwards. And welcome to this special Nugget Quick Shortcuts to Small Apartment Investing presentation. And today's topic is small apartments versus Wall Street. I called it in the promotion leading up to it and really what I mean by we're going to do a comparison of small apartments versus traditional Wall street products. And in the process hoping to open your eyes as to, you know, some alternatives than what we were led to believe going the traditional route. And so welcome today's Quick Start or Quick Start, Quick Shortcut, this Nugget webinar. So I want to start off and explain this is that. And by the way, here's the way it's going to work today. At any point you have any questions, type it in to the chat box and I'll be answering questions along the way. I'll answer questions towards the end. This is going to be a short, you know, nugget. These are again, these are the quick shortcuts. Probably about 15 minutes or so here to go over this point, but I want to introduce it to you enough to where it'll spawn enough some more questions that if you're really interested, we do a deep dive discussion after my prepared remarks. But to lead off on the conversation about small apartment investing versus Wall street, one of the first things I learned years ago when I was getting started, my first mentor pointed out this to me about what are the five attributes of the ideal investment? The ideal investment, well, you take the word ideal and you take the five letters and you break out like an acronym. The ideal investment has income. It has passive income. The ideal investment has depreciation. That's tax depreciation. You get the tax benefits of depreciation. The ideal investment allows us to build up equity by paying down a mortgage. All right, that's what that equity means. You're building up equity by paying down a mortgage. The ideal investment also allows us to build up equity by appreciation. The value is going up, the value is going up. And the fifth attribute of the ideal investment is we can buy it using other people's money. In other words, we can buy it on leverage. So real simple way to understand the ideal investment. So what we're going to do, we're going to look at different options that we have in term and choosing investments, and we're going to line them up in comparison to the ideal investment. So I'm going To start at the top of the list, which is my topic, my favorite is small apartments. Now if you look at small apartments, it has, they have all five attributes of the ideal investment. Do they have passive, Those small apartments have passive income? Absolutely. We put a management team in place and they send us monthly checks, mailbox money. Do small apartments offer us tax depreciation, huge tax depreciation benefits? There's an area now called bonus depreciation where you get huge tax depreciation or tax deductions in the same year that you buy the property. So there's huge depreciation benefits. Small apartments equity. Can we pay down our mortgage in small apartments and build up equity? Absolutely. You know, the bigger the mortgage that you have on a property, look over a five year time period, every month, paying down the principal, making mortgage payments, paying down the principal. Well, if you got a two, $3 million mortgage over five years, that's several hundred thousand dollars of paid down mortgage principle, that is equity that comes to us when we sell to refinance that property. Small apartments offer appreciation. It's called forced appreciation. And forced, and I, the term, I call it is potentializing. We get the full potential out of these assets. But basically whether it's called forced appreciation or potentializing, what that means is every time we raise the rent, every time we raise the occupancy, it forces the value up in a predictable way that any commercial appraiser. Everybody uses the same formula and we're forcing the value up in a predictable way. That's also creating equity for us. And this is huge, huge returns. The way the math works out, you raise the rent $100 on an apartment, you've raised the value of each apartment door $16,000. $16,000 value increase by raising the rent to $100. That's the power of forced appreciation. And then the five, the fifth attribute is leverage. When we buy small apartments on other people's money. Of course, that's what real estate's famous for. Whether you use traditional lenders, seller financing, private lenders, combinations. That's how we're really boosting the ROI on these, on these investments is by really an arbitrage play of borrowing money at one rate on investments that pay a much higher rate. And I'll show you that in just a moment. So small apartments are the one vehicle that meet all five attributes of the ideal investor. I should include, be fair, income producing real estate. Income producing real estate satisfies all five attributes. Let's look at stocks. You buy a stock, okay, let's Compare it against ideal stocks provide. They can provide passive income if there's a dividend associated with it. If not, you don't get income. There's generally no depreciation. You don't get any depreciation by buying stocks on Wall Street. Do stocks have appreciation? We hope so, but it's not predictable. It's just dependent upon market factors and the performance of the business underlying that stock. Do we have equity? No, no. We're not paying down a mortgage with stocks. Can we buy them on leverage? Yes, we can buy them on margin. We can leverage the value of our portfolio to borrow money against that to buy other stocks. You can get leveraged. So it has three of the five attributes of stocks. How about bonds? Bonds, which people buy or, you know, income. So bonds clearly satisfy the income category. They don't have depreciation, they don't have the equity, they don't have appreciation. You don't buy bonds for appreciation. They might appreciate, depending upon how interest rates go, but that's not why you get into bonds. And you can also buy them through leveraging, buy them on margins. So bonds have two of the five attributes and then the fourth, you can buy a business, you can own a small business. And I know a number of you here probably own your own business. So do small businesses have passive income? They have passive income if you have someone else running it for you. Now, if you are the business, if you are, if everything depends upon you, that's not passive income, that's active income. That's a job. So to have true passive income, you need to have a CEO or a general manager running it for you so that you're passively involved. Do we have depreciation with small businesses? Yes. If you have lots of heavy equipment, you have a lot of capital intensive equipment, you can get depreciation on the equipment. But if your business is mostly office furniture, there's not really much depreciation there. Typically don't have a mortgage to pay down on that. You might have seller financing. You might have equity pay down if you bought it on seller financing. Does a small business offer appreciation? Absolutely. As long as I keep increasing the income, the value of my business goes up. If, if I have true passive income. You know, really, if, if you are the business, you really don't have a sellable asset because you are the business. There is no business. It's, it's basically a, it's a job that pays very well. But if you have a business that has, you know, third party manager running it, then you can have the value of that business going up as raise the income. And can you buy a business with leverage? Of course you can. You did as well. So we do these comparisons. You line them up. Small apartments or generally income producing real estate is the ideal investment. The ideal investment. So that's, let's start from there. So that's comparisons between real estate versus Wall street versus owning your own business. So let's talk about some Wall street specifics because I don't know about you, I was taught these early on. This is the way you go. Well, one of the options on Wall street or that was created by Wall street is self directed IRAs. We get tremendous tax breaks. Thank the Congress put this in place for us. We get the tremendous tax break. Especially if you have a Roth ira, you never pay taxes on it. You have a traditional ira, you're kicking the can down the road, you're deferring the taxes at some point down the future, but they've got these tremendous tax breaks. With your self directed IRA you have an infinite choice of investments. With a self directed IRA it can be real estate art. There's always things you can invest in because it's self directed. And that's both a blessing and a curse. Because the blessing is you have an infinite choice of investments. The curse is how do I pick, how do I safely pick what I'm going to put my self record IRA into? And it is because of that one question, the uncertainty over knowing how to safely invest self record IRAs that most IRAs, as a matter of fact these are statistics. I heard this at a conference recently. 97% of all self directed IRAs earn less than should be earned. Less than 1%, not zero earn less than 1%. Actually they're earning less than 0% right now. If your IRA is sitting in cash in an inflationary environment, then it does have a negative return. But 97% earn less than 1%. Because most IRAs are sitting in cash. Because the owner of the IRA, it's their responsibility to choose the investment and go through the process of making the investment. And because they're not sure how to safely pick the investments, it sits there sometimes for decades. Sometimes people forget about it. And now for it to be a true, for it to be a self directed ira, it must be in a true self directed IRA administrator, let me give you an example. So I have an account with Fidelity and years ago I had my self recorded IRA infidelity in cash. And I asked my Fidelity representative one time with the phone, I said, hey, can I can, I invest myself directed IRA in real estate. And the Fidelity representative said well no you can't. I said wait a minute, wait a minute. I know for a fact that you can use self directed IRAs to invest in real estate. Why are you telling me no? He said, well, let me clarify. You can invest in General self recorded IRAs and real estate, but I can't sell you real estate. So you can't use your Fidelity self directed IRA to invest in real estate. So that's what I mean. If you want to be able to use your self directed IRA to invest in real estate, you have to be with a true independent self directed IRA administrator. Companies like directed IRA quest to that too that I can recommend and you know, Fidelity, you cannot. You cannot. So you got to be with a true self directed IRA administrator. And I say true, that means a true suffix. IRA administrator does not have a product to sell you. Fidelity is there to sell you Fidelity products. And that's all. That's all. They will sell you an independent self IRA administrator, doesn't they? They have no, they have no dog in that hunt. Just make sure you put it, you know, in the property, in the proper investment. So that's self directed ira. So many of you I know are sitting on self directed IRAs. And I'm going to tell you in a moment here about maybe an option where you can put the self directed ira. But so much, because so much is sitting around earning nothing. It's actually, it is negative return in an inflationary environment. So that's a typical Wall street option. There's another one, this is a big one, 401ks. You know, going back to my earliest days in corporate America. I entered a corporate world world back in 1985 and 401ks and I put a 401k in. And everyone talked about all the power of a 401k. And because it comes with tax breaks, your deductions that are coming out of your payroll or you pay before taxes, you put it into these tax deferred vehicle. You can have matching funds from your employer. You get tax advantage on that as well. And so it's still have the same tax breaks. 401ks on the surface are easier to work with because you're only given a short menu of investments. There's usually going to be some company that'll give you a list of stocks and bonds that you can use your Money and your 401k to invest in. You can watch the returns on those stocks and bonds and they're generally publicly traded stocks and bonds. And you cannot go outside that menu of what you're being given. And you cannot invest your 401k in real estate. This question comes up all the time with my clients. You can borrow money out of your 401k and pay yourself back and can use those funds to buy real estate. You can cash out your 401k and buy real estate, but you cannot self direct your 401k if you're working for someone else into real estate. You need a self respected IRA for that. Now the reason these limitations are put on 401k is guess who created the idea of a 401k? Wall Street. And so your limitations for investing your 401k are Wall street products. It is an, it is a creation by Wall street to benefit Wall Street. Let's just be, you know, put the cards on the table. That's what it is, okay? It still has great tax breaks. But you're limited in your choices. The self recorded IRA is far greater. There's choices for you. That's also part of the curse if you don't know how to go pick those investments. All right, so that's 401k. So let me shift gears real quick. So I call this the 40 year plan. This is what I was taught. This is 40 year plan. We were thought 40 year plan. We were taught the model. When I was in school, I think, I think as early as the first grade they pulled me aside and said, hey listen here little Lance, here's the way it's going to work. You're going to come to this school for the next 12 years. You're going to work hard, study hard, you're going to get good grades and then you're going to graduate from high school and you take those good grades and you're going to go to get some secondary education and you can do the same thing there. You're going to work hard, study hard, get good grades so you can get a good job, right? And then with that good job, you're going to work hard and you're going to save away a portion of your take home, actually a portion of your pre tax, part of your salary, part of your income. You're going to put into a 401 and you're going to let that 401k grow over 40 years. And after 40 years when that 401k has grown, you have this nice nest egg. Then you can retire little Lance. And you will live off the income of that nest egg. 40 year plan. Sound Familiar, I imagine so everybody here, and the problem is the 40 year plan kind of let us down. One of the things that happened in 2008, unbeknownst to us, when the credit crisis hit, that 401k became a 201k. That's literally what mine did. Chopped in half. Between the period of September of 2008 and March of 2009, the stock market went down 50%. Oops, oops. And so a lot of people sold, you know, if you happen to hang on, you recovered from that, but if you sold, you were like starting all over again. And so the 401k, it's not that it doesn't work, but it has not worked for so many people. And the main challenge with the 401k is what they really didn't tell us, emphasize enough, is you better start for that 40 year plan to work, you better start saving away in the earliest years of your career. So you have the benefit of compounding over the 40 years. The problem is in the earliest years, we're making the least amount of money. We have young families to raise. The money is going to everywhere except a 401k. And that's where so many people find themselves today, is they're running out of time thinking in the terms of this 401k model. And that's the fallacy of the Wall street products in that regard. And so they feel, people right now feel trapped. They feel like they're trapped. They feel like they're on a hamster wheel. They're trading their time for dollars and they feel like they are running out of time. So if you're feeling that way now, which is a feeling of anxiety, let me share with you an alternative, because there is an alternative. This is the Wall street alternative, and it is small apartments. Small apartments. They are the ideal investment and they are conservative. You know, people call Wall street the traditional investment. Since when did real estate not become a traditional investment? I think Wall street called it traditional because you got to go buy it from Wall Street. Small apartments are available to everyone. Everyone. And these are conservative investments. Let's break it down. When you, when you own a small apartment building or you invest in a small apartment and building, maybe you're investing in somebody else's project, you'll be investing maybe one of my projects. You have a hard tangible asset, not a piece of paper. That's a stock which may or may not be backed by any kind of hard asset. If it's, if it's a pure service business, there's no hard asset there, but you have a hard tangible asset that is cash flowing. So it produces, think of it produces a dividend every single month that we get to enjoy that return. Plus it's an appreciating asset. Plus we're buying it on other people's money, so it's paying down the equity. Plus it gets the depreciation tax benefits, which reduces our tax burden, which boosts our cash flow. All right, so you're getting all five attributes of the ideal investment with these conservative small apartment vehicles. You can do it as an owner, where you actually own it and you put a management team in place. You can do it as an investor where you're passive, you put money into other people's projects and you get a passive return. Or you can partner. For example, if you have a small apartment, you can buy the small apartment and partner with me and I'll run it, I'll run it for you and we'll do a 60, 40 split on it and you get the 60. So there's different ways in which you can participate. In a moment, I'll show you how you can, you can do that. Now, if you are, if you are an owner, which means you're active, you're actively making the decisions, you're not actively landlording. Let's get this straight. As an owner, you never, never, never landlord, Right? What you do as an owner, we are asset managers. We put a third party manager in place and we direct the management company. We make the decisions and we direct them as an asset manager. As an asset manager, not as a landlord. If you are a landlord, I'm going to show you what to expect as a landlord, much less. But if you buy a property as an owner and you are directing that the property manager, your roi, if it's your cash in the project, you should expect 30 to 40% minimum ROI per year. Per year. So let's say you buy a $500,000 eight unit small apartment building and it needs $100,000 for the down payment. And let's say it's your $100,000, the ROI on your $100,000 will be 30 to 40% and more if you do very little to it. Now, we're not going to cover it in this shortcut today, but I get much higher than 30 to 40% because I'm constantly raising the rent, constantly raising the other income. I keep enhancing the experience. So in exchange for that, they pay me. But 30 to 40%, that beats anything. You'll throw a dart on Wall Street. Conservative, predictable, that's the returns you get as an owner of small apartments. Now if you're passive, if you're investing your money into other people's projects, Your return is 12 to 15% per year. Totally passive. You don't make any decisions. You're not allowed to make any decisions. You're to going because you're the passive participant. Still, that beats, you know, the average of Wall street is like 9% over 10 year period for the small apartments. Even passively, you're getting 12 to 15% ROI on a hard tangible asset that's cash flowing and appreciating. And you share in all of that. If you are a landlord, you're going to get about the same 12 to 15% meaning you're doing all the work, you're, you're collecting the rents, you're doing the painting the interiors, you're handling the evictions, you're showing the units, you're doing all the accounting. If you are actively doing that, you're making about 12 to 15% mostly from market appreciation and paying down the mortgage. So if you're going to, if you're going to, if you were happy to take 12 to 15%, just invest your money with somebody else. But if you want that 30 to 40 plus percent per year return, that's when you own these properties, put a management team in place and you direct them and you can use your self directed ira. You can use your self directed IRA to invest in other people's projects. My investors are mostly self directed IRA investors. You can invest your own self directed IRA in your projects. As long as you have a management company in place. You've got to, you've got to maintain that independence. You got to maintain that independence. And so this is why I'm calling it the Wall Street Alternative. This is why I think if you're here, obviously you must have some interest in small apartments. I think you need to be owning these assets and if you don't want to own them, you need to be investing in them. Many of my clients are doing both. They're doing both taking their self directed ira, investing it in a project and then using other people's money to buy projects that they own and asset management themselves. You've been listening to interview with the experts with Lance Edwards. Let us now blatantly and shamelessly bribe you toward creating your own real estate lifestyle by offering you a whole bunch of free stuff. Go to greenlightreinvesting.com and get you some free stuff. And this session's show notes that's greenlightreinvesting.com.