Asset Management Deep Dive with Mark Brower

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Okay, so you and I have talked about this before. I remember your words very clearly. You're like, I'm not getting paid for that, you know? And so that's been ringing in my ears. And you're not wrong that we don't usually get paid for asset management. But what if, what if we designed a plan compensated us fairly for asset management? What, what if we tested the market? What if there is demand for full-stack asset management? And what if we could monetize that? What if we could sell that? What if we could give some guarantees that would be really compelling with that offer?

Welcome back to Peter Lohmann's podcast, guys. I know I keep saying the season is over, but I keep finding more reasons to get behind the mic with people that I respect and enjoy talking with. So today I have in the studio with me Mark Brower. How you doing, Mark?

I'm doing great.

Awesome. So Mark, you texted me this morning, like 7 AM my time or 8 AM, I was on my way to work, an interesting idea about asset management. And I wanted to just jump on and record and talk through this idea with you a little bit because it's something that I've thought about on and off over the years. So Why don't we just start by having you explain the idea and then we can kind of tear it apart and see if there's anything, any useful takeaways.

Okay. Well, I trust that as I throw out what are often scattered ideas in my brain, you can bring order to them. So the question I keep asking myself is, what is the most value or the most good that a property management company can do? Because if we pursue, I believe we pursue the most value that we can create, then we will be rewarded the most. And so over and over, that question leads me down the thought of asset management. And particularly if, you know, somebody framed it once, you know, everybody's going to Maui, sell the trip to Maui. We're all going to Maui. Okay, so what's the trip to Maui? The trip to Maui. If to use that analogy, is that we help people build generational wealth. We help good people, great people that we love working for, that we love sacrificing the best hours of our days and the best days of our lives doing something for. It has to matter. We want to help those people build intergenerational wealth. Generational wealth. That's the highest aim I can think of. And so to really Affect that outcome. The role expands from transactional property management to a proactive asset management for intentional investors. And that might mean that we have to help take landlords by the hand and help them become intentional investors, but then we have to craft an offering that really helps them over 20 years build a portfolio of 4 to 5 homes that double in value, get themselves paid off, and they've got some nice cash flow and a cornerstone to a solid retirement? Is that the best? Is that the highest aim we can point at?

Well, I think you're sort of presupposing with this line of thinking that real estate investing is the best way to do this and that your specific city is the best place to buy additional properties.

I'm so glad you just mentioned that.

Coincidentally, you happen to have a management company there. Wow.

Yeah, yeah, yeah. I am. I'm so glad you mentioned that. I want to dive into that. Go ahead.

But yeah, that's basically what I wanted to say is I think where I sometimes get caught up when I start to go down this line of thinking, because I just get to wondering like, well, if this is really all so great, why aren't I buying more properties? Like, why am I spending so much time helping other people do it when I could just do it myself? Which I have done. And at least for me, I think the truthful answer is that the deals aren't very good right now in Columbus, Ohio, and they haven't been for many, many years. And so am I truly helping people build wealth by recommending they buy more rental properties in Columbus, Ohio, that are overpriced and deferred maintenance when instead they could be putting that money in an index fund Or I don't know, there's something here that always kind of trips me up and I get a little scared and I back away and go back to just being a property manager.

I think there's a few things if we can unpack. Number one, I've asked myself the same question, like, if this is such a great path, where's the integrity behind my behavior if I'm not doing it, you know, and can I really approach my investor? Can I really approach the marketplace and say, hey, this is— I'm helping you get to Maui. Trust me, I'll guide you by the hand. By the way, I only manage in Phoenix, so you know, you're stuck with these assets even though they're not the best that you can gain access to. So I want to unpack that a little bit. I also have— when I question myself about, well, why aren't you doing more of this, Mark? Here's what I think my authentic answer to that is. I love building businesses. I love reinvesting pre-tax dollars into the growth of my own business. I love that. And not only is that more satisfying to me, but I think it also, if done right, gets me a higher yield on my money. No doubt.

Okay.

So check that box because there's no phony, you know, there's no phony business here. It's not like I'm not willing to drink my own Kool-Aid. I think investing in real estate is a fantastic idea. However, let's be honest, it is not for everyone. So I think we have to be really clear about that. Like if we oversimplified it and say there's a spectrum of emotional and psychological tolerance, right? From like never should even consider investing in real estate to like, oh yeah, this is a really good idea for this person. Like we need to draw that line and say like, hey, you know what? I don't think this is for you. You are way too emotionally tied to this asset in the first place. You have a need to micromanage. You are not financially strong, whatever it is. And it's like, let's sell this house for you. The best thing for you would be to sell this house and put that money in the S&P 500. So that's the first fork in the road, right? And if we think, okay, this person's worth taking a chance on, you know, they're not the perfect ideal client, but I think with the content we've developed and the process we have in place, I think we could take them by the hand and lead them from reluctant landlord to intentional investor. They seem to want to do this and we believe they have the makeup for it. Let's be intentional. Let's start moving forward on this journey. I think that's a decision point.

So would you say then that like for most metro areas in the US, still today, like, take a random person off the street with $100K, they would be better served by investing— assuming they had the right temperament, they would be better served by investing that money into a property that you now manage for them versus some other investment?

I can't speak to that because I haven't studied enough of the metro areas in the United States, but I can speak to Phoenix. And I believe for the person with the right temperament, that's absolutely true. And this might seem a little out of place, but here's a thought I'm going to connect with this. I believe for me, I am a terrible saver.

So this isn't the primary component, but this really, that surprises me a little bit.

No, no, I'm not. I'm a terrible saver. Terrible.

You're kidding. That doesn't correlate with what I know about you.

I feel like, no, no. Peter, I'm a foot on the gas guy. I'm like, I, you know, there's brakes people and there's gas people. I'm a foot on the gas guy. I will, I need people around me that pump the brakes and my wife and I both spend and like I'm the brakes in the marriage, which is a scary thing. So like we don't save.

Do you have a financial advisor?

I need your, I need your guy's phone number.

You need to get with my guy.

So terrible saver for other people like me. Why not turn investing into an expense? And what I mean by that is I saddled myself with like 3 or 4 mortgages in my 20s because I just moved every couple years and only put 5% down and kept the old house as a rental. And I was wildly wrong on my cash flow projections. I was negative cash flow on almost everything, right? And you know, my initial assumption was like, oh sweet, my mortgage is $920 a month. Including, you know, escrow and pounds, and I'm going to get $950 a month in rent. This is cash flow positive.

Oh my gosh.

Yeah. And I self-managed and I did a poor job of it and I had a string of evictions. It's, it's like, it's amazing to me that I stuck with the asset class. But what was really, really helpful to me early on was that I had saddled myself with this debt and I know that if I put myself under a little bit of pressure, I always perform. I always almost always perform. And so for me, that was a useful thing for me to do because it forced savings. Okay.

So that's— and it's levered. It's levered for savings, which—

yes. And so that's a talking point all on its own. I think if done right and somebody has financial strength and they have a saving problem, you know, there's some inherent benefit. Totally independent from just the returns. But I think, you know, even in Phoenix today, we could get much better returns a few years ago, but even today you can get close to 18% levered returns. But you know, if you're coming in with 20, 30% down, you're going to be negative cash flow. And so, but if you have a broad enough perspective on the long-term picture, you're going to be negative cash flow for 5 to 10 years. But your balance sheet's growing and you're benefiting and it's a great thing. It's like you're putting, okay, let's say, so you've put $400 a month to supplement your negative cash flow. Well, you were doing that. You were putting that in an IRA anyway, and you're going to get better returns here. So I can still make the argument that very few people seem to resonate with that the numbers still work today here. But to your earlier point, I think if we get really intentional about this, we have to give our investors access to the markets where they have really great returns, and that requires expanding your footprint as a property management company.

Or it requires partnering. There's a couple groups that are facilitating this really in a really interesting way right now. Blanket and Lineage are both creating marketplaces of sort of approved and preferred property manager networks that let investors do exactly that. And so if you have a client who wants to add properties but not in your market, you can introduce them through this network and then you get a piece of that and vice versa. Folks who are in the network who are, who have investors that want to invest in your market will get funneled to you. So some really interesting things, I think, coming down the pike for our industry through a couple of these vendors, which really leads nicely into kind of the meat of what we wanted to talk about today, which is asset management. Something Lineage and Blanket are both very focused on. So expand a little bit on what you texted me as like an additional revenue stream for property managers having to do with asset management.

Okay, so you and I have talked about this before. In fact, you, I remember your words very clearly. You're like, I'm not getting paid for that. You know? And so that's been ringing in my ears and you're not wrong. That we don't usually get paid for asset management, but what if we designed a plan that compensated us fairly for asset management? What if we tested the market? What if there is demand for full-stack asset management? What if we could monetize that? And what if we could sell that? What if we could give some guarantees that would be really compelling with that offer? So I'm sorry, what did you, how did you want me to approach this?

Well, say the pricing idea that you had and what would be included.

Well, I mean, if we look at asset management in the capital markets, I'm just going to rewind a little bit. So when I was in my early 20s and I started making money in commercial real estate, of course, you know, I'm getting hit up by financial planners and I, and I realized after doing my due diligence that I did not want to work with someone that made most of their money through transaction fees. Right. And I discovered there was this model of asset management where you would pay a percentage of assets under management. And to me, you and I, you know, we've talked a little bit about incentives. I, to me, that aligned incentives. I didn't want an adverse motivation to transact a lot, right? And so this idea that there's a whole industry around charging a percent of assets under management, I think can translate into what we're doing possibly. You know, I don't know that anybody's tested this, but For instance, what if you charged 1% of the home value annually? And by the way, yeah, yeah. What if you charge 1% of the home value annually and you actually added the value that an asset manager in the capital markets adds? And in addition to that, you also did the day-to-day property management, which is not a small thing.

Would that be included?

Yes.

In the, like the 1% would include property management and asset management or the 1% would be over and above the normal property management?

No, it would include both. It would include both. And I think we would be wildly successful, profitable.

So like take a $600,000 house, that would be $6K a year total. So that would be $500 a month.

Yeah. Show me a good operator making $500 per month managing a residential home and put a full stack of asset management services on that. Absolutely profitable. That would be—

Oh yeah, there's no doubt it would be profitable because that's well above, you know, what most property managers are making today. And you know, there's probably still going to be some fees over and above that 1% on certain things. Today's episode is brought to you by Lineage. One of the biggest opportunities in the property management industry is the investor relationship. I actually have a great quote here from Marc Brower himself. He says, the fundamental problem of property management is the delicate trust that exists between the property management and the accidental landlord client. I love that quote from him. So you guys know it's really hard to build strong relationships with accidental landlords and investors. So basically all of your clients. And it's one of the reasons that our industry has such a high churn rate on average, north of 20% per year. Rather than focusing on reducing churn by reducing every single problem that could ever happen, which isn't really possible, what if you could convert your average client into a lifelong investor by helping them zoom out and see the wealth-building power of real estate delivered by your company? Lineage is on a mission to do exactly that. Basically to provide an asset management arm to your property management business. It's pretty wild. So here's how it works. They're an asset management platform and they're designed to work with professional property managers and their current management software. They have a platform that shows the full financial picture to your clients, as well as a dashboard and insights for you, the property manager. Lineage combines technology with a very high-touch outreach to your client, the investor. They do asset review calls directly to your client. This is a done-for-you service. They provide education for owners to help them become investors. They help them with planning to help them grow their portfolio, and they also do training to help them understand the various options to compound their wealth. Again, they do this for you. The platform gives clarity to the 4 returns in real estate, helps your client understand this. With a view that mirrors other investment options and sort of compares and contrasts. The platform also gives them the ability to grow their portfolio via vetted properties in a marketplace. And finally, the platform gives them the opportunity to understand the full picture of their investment for properties in different markets. And you get the opportunity to earn monetization when your client, if they decide to buy in a different city. So here's the outcome. You can transform your business with Lineage. 3 main parts here: property management plus asset management. Owners become investors. That means they're easier to work with and they cost less to manage, frankly. And churn becomes a profit center, growing your profit by double digits. So if you like what you hear and you want to learn more, go to lineage.finance/pm and click partner with Lineage to book a demo. Again, lineage.finance/pm. Click Partner with Lineage and book a demo today. Thanks to Lineage for sponsoring this episode.

You know what else I really like about this idea? If this could be sold, if we could sell this, first of all, I'm very confident the value is there if done right. But I also believe that the conversation is even more unusual, or, you know, this idea of creating a category of one, you know, Are we gonna play the game? Are we gonna play the game where we do what everybody else does and we're just more creative about extracting, you know, more fees in, in sort of nefarious ways? Like, like, are we gonna play that game or are we gonna play the game of completely changing the story, the dialogue, the mission, the trip to Maui? It's totally different. It's like, we don't do, yeah, we, we do property management. Of course we do property management because we have a Full package asset management suite of services and property management's integral to that. But we are like a financial advisor charging 1% of the asset value. We are inherently motivated and aligned with you in building towards your $4 million portfolio 20 years from now. That's what we're doing. That's what we're doing together. And we have all these guarantees of protections and we have such great transparency. And by the way, one of our services, which I think could be a fantastic idea by the way, is we have a full premium accounting suite of services, including escrowing for your future vacancies and repairs. How brilliant would that be? Because the occasional, the anonymous, the random punch in the face to the investor, the landlord about an impact to cash flow, I think is what's so jarring and what shakes a lot of people out of this asset class.

You'd be handling their reserves for replacement. And some of the things you listed that would be included here would be handling their mortgage payments, which I like that idea for a couple different reasons. One of them you mentioned, helping them save money on insurance. That's an easy win and also a potential revenue stream. Another one is something that's always bothered me about what we do as property managers shows up every year in January.. And that is we send the owners, the clients, their year-end owner statement, which has, you know, January through December income statement, all the income, all the expenses. We give that to them and we say, see you later. And now they have to take that and do their taxes and what they end up having to do. And if you own real estate, you know this, you have to now merge that with your mortgage payments, you have to separate out the amortization expenses, like the larger capital items have to come off the expense side and be moved over to a depreciation schedule. You got to add in any of your travel or your personal expenses that are associated with managing that property. And so when we hand off their rental owner statement at the end of the year, we're really just handing them a big pile of work that now they have to go and do more work to get their taxes done. What I like about handling their mortgage is that's the one big thing that we don't have eyes on as the property manager. And if we did have eyes on that and we did take control of all of the capital items and accounting for them properly, we'd be able to hand the owner at the end of the year a much more complete tax and accounting package that they could take right over to their CPA with no modifications or very little modifications. And execute on their taxes. So that I think is a really cool kind of side benefit.

Yeah. And we also then have all the data to show them a comprehensive view of, of their returns, of their actual returns, because we don't know that actually. Yeah, exactly.

Isn't that kind of mind-boggling that we're the property manager and we can't tell them the performance of their property, the financial performance? That today, to this day, that bothers me. And I'm really excited for Blanket Lineage and some of these folks that are going to help us solve this because it just seems criminal. It's like, that'd be like at the end of surgery, you ask your doctor if it was successful and he's like, I don't really know. I mean, I kind of did my best, but like, you're just going to have to wait and see. It's like, what? I'm paying you all this money. Like, you're a fiduciary. How do you not know the performance of the property?

By the way, quick sidebar on that. I think Blake and Lineage are doing some of the most important work in our space, like just absolutely very important, incredible work because they're enabling this elevation of, you know, value creation and, and contribution within the property management. It's tools like this that will enable this transformation to happen. And I think absolutely over the next 5 to 10 years, we're gonna see smart operators moving this direction. I'm really excited about it. You know, people are talking about these proactive quarterly outreaches to the owner, you know, which that's proactive asset management. Beautiful. That's a, that's a great routine. I aspire to that. We want to do, we're doing it once a year. I'd love to do it quarterly. How cool would it be if you're using Blanket or Lineage? Full disclosure, I'm an advisor to Blanket.

Full disclosure, I'm an advisor to Lineage.

Okay. How cool would it be to have your property managers thinking like asset managers, looking at reports that show if, you know, each individual investor's property, whether it's in the bottom third, middle third, or top third of performing assets and across the whole portfolio, across the entire portfolio. And how cool would it be to initiate an outreach to an owner saying, hey, by the way, You might not be aware of this, but your, this asset, 123 Sesame Street, is in our bottom third of performing assets. And I want you to know I'm aware of this, that I'm watching this, and that I want to see that trending up within the next 6 to 12 months. And if not, we should talk about repositioning that asset. How cool would that be?

That's a really interesting idea. What metric would you use to gauge performance there?

You're getting too technical for me, Peter.

You figure that out. The details matter.

So, right.

You can't just do like ROI because that, that factors in like how much they, you know, put down originally and everything else. So, I mean, you could look at like, what would be the appropriate metric here to segment performance into thirds or quartiles? I mean, maybe it would be Like just straight up like ROI or—

why would it not be ROI at the end of the day, right?

Maybe it would be ROI. What— and like that would guide you toward advising your client on like a cash-out refi to boost their ROI because it lowers the amount of invested capital. 100%. Yeah, there could be something really interesting there. And like that would also I mean, we have owners that complain, right? And like, how powerful would it be to go to them and say, hey, Mr. Lohmann, I understand you're upset, but let me tell you, you're in the, you're in the top 20%.

That's exactly it.

Performing properties like you got, you're doing awesome.

That's exactly it. That is exactly it. And for the ones that are about to get upset, we should know better, Peter. For the ones that are about to, there will be a high correlation for the people that will be upset over the next 12 months. And their properties by and large would be in that bottom quartile hypothesis. You know, I believe that would be the case. And so what we're doing is we're, we're making a really strong proactive move where we're saying, hey, we see this. By the way, we see this as correlated usually with higher investor stress. We're going to keep an eye on this for you. And then 6 months later when they get really pissed off, about usually money, right? And what do they do? Their reaction is go criticize the property manager, micromanage the property manager. No, remember?

Yeah. Yep.

Oh, I'm so glad you're calling. Remember we talked about this 4 months ago? Yep. This asset's underperforming, but you guys screwed up on X. No, no, actually, hey, you know what? That might be possible, but we have gotten so good at self-policing and auditing our own behavior and compensating our landlords for our incompetence proactively before you even know about it, which is a different, you know, topic and something I aspire to. I think it would be incredible if we did that. So relax, we're going to make you whole if we did something wrong. I don't think we did, but let's let the dust settle and we'll give you a complete, total, transparent timeline of everything. We have someone internal that can run those, those case studies. We've, we've consolidated our tech stack and we're so good at like being able to parse this out and find out if there was incompetence. And our commitment to you, of course, because you're on our asset management plan, is that, you know, for any of these, if we did delay or cause you any harm, we're going to reimburse you 100% out of our pocket for that. But let's get back to the main point. This asset's underperforming. Let's come up with a plan.

Yeah, I was thinking a little bit more about that ROI number. The one thing the ROI doesn't take into account is appreciation. So it might have to be like return. It might have to be like return on equity. No, I don't know. That's worth thinking about a little bit further. Like what is the right metric to gauge our performance as property managers on?

You know what I, you know what I really liked and what I would like to parse out, what I really liked about what you said about this ROI number is not only could it highlight an underperforming asset because it has a much higher maintenance expense or whatever, right? Ratio, but it also would point out an underlevered portfolio, right? Which I hadn't thought about, but that's true. And so I don't know if you want to go, if you're willing to talk about this next, but something I've been mulling about is what are the key characteristics of the profile we need to understand about the human being, the investor that we then need to blend with asset performance. It's not all about asset performance. In a perfect world, we'd have unemotional robots owning these properties. It'd all be all about asset performance. There are like 3 or 4 key components about the profile of the individual that need to be melded with asset performance in order to make an informed recommendation and act like an asset manager. And some of those include investor timeline, you know, are they like 65 and they're like, don't touch anything. I'm going to all cash. Let this pay off. I'm not doubling down my equity, not doing it. So investor timeline. Risk tolerance, financial strength. Can they afford negative cash flow? For instance, you know, can we maximize long-term gains by actually going negative cash flow? We would need to know that. And then maybe temperament. I don't know.

I don't know. Yeah, there's a lot. The financial advisor world has long known about these things, and I'm sure there's a ton of useful information we could steal from that industry about how to deal with different types of investor temperament, how to ascertain risk tolerance. How to approach different types of clients with your advice and recommendations. I mean, half the value of a great financial advisor is the human psychology part of it, right? The client calls them in a panic when the market's down 5% in a day and the financial advisor talks them through it. Remember, we have these long-term goals and we have you set up with these bonds and like talk them off the ledge and like a couple key conversations like that on the right day. Can compounded over a lifetime yield millions of dollars of additional profit because you prevented your client from selling in a panic or buying because a stock tip from their buddy or whatever. So it's, it's at least half like human psychology.

It's 90%. Yeah, it's way more than half. And guess what? Yeah, we are already doing this in property management. We're not getting paid for it.

Right. Okay, so 1% annually. What else? We talked about mortgage. We talked about maybe being more aggressive about self-policing and owning our mistakes and compensating for owner— compensating owners for that without even being asked. What else are you picturing would be in this asset management package option?

So I don't know for sure, but here's an idea. A guy I know years ago started an unlimited graphic design business, and I thought, this guy's crazy. You know, for $150 a month, you get unlimited graphic design. He's going to go out of business. But the genius, I think, behind the business model was the word unlimited. And so of course, people would subscribe and they would, they would overuse it for a few months and then they would underuse it forever and they would never want to, like, cut it off completely because it works and it's there when they need it. Right. So maybe to create enough value for people to pay the premium required to run this level of service, maybe there would be some kind of unlimited components to it.

I feel like we already, like implicit in the property manager relationship is already like unlimited support, like unlimited phone calls, unlimited emails. Like why, why aren't we getting credit for that?

Yeah. Yeah. Well, okay, so here's a twist on that. What if they had unlimited access to Mark Brower? What if they had unlimited access to Peter Lohmann? And you know what? I think the perception of value could be very high there. And I don't think people use it as much as I would be afraid they might use it. What if there was unlimited? What if there was a home, home services component to this plan to create additional certainty? I think this is a hard piece. That I'm nowhere close to figuring out. But what if there was unlimited service calls when it's a tenant-occupied property for $99 per service call regardless of— it's almost like part of this is actually a home warranty that actually works. And there was a, I don't remember the company name, but like 20 years ago before I got into property management, there was a local big operator in Phoenix that actually started a home warranty company because they had a couple thousand units under management, property management, and they figured out how to do it and they did it in a way where people were really happy with it. They were thrilled with it in fact, and it just smoothed out the cost for everybody. So what if that could be part of it? What if part of it is this Platinum Plus protection? So we have a Platinum plan that covers certain amounts of eviction damage costs, loss of rent for certain conditions that present just to kind of like lower the risk. For landlords and, and we go up to like $5,000. What if I put that up to $10,000? You know, it almost never taps out at $5,000. So the, anyway, I think we could layer in, we negotiate the deals for insurance, the premium accounting services, asset protection, legal services. I mean, we should be helping our owners figure out how to put the legal entities in place that, that protect their equity., right? Maybe exclusive wholesale acquisition opportunities. And, and I don't want to make this, of course, when I'm in dreaming mode, I'd like want to go crazy and like layer in all these tremendous things that might be impractical to fulfill on the backend. But this idea came to be because we have this guy helping us with our AI-powered SMS outreach to skip trace lists of investors in town right now. He's a home flipper. And he's like, Mark, there's a whole layer of deals that we just throw by the wayside because they don't have quite enough margin to be a wholesale opportunity, but they're still like 20% under market. And you know, an investor, a buy and hold investor could scoop these up all day long and there'd be like these really win-win relationships where, you know, we, we could create this wheelhouse of opportunity.

Yeah.

Yeah, those are some other ideas.

So I think when I think about like a product creation, and this is what we're, what we're discussing right now is, is creating a new product, an asset management product. I often want to be able to articulate the value with one or two key phrases that make the whole thing incredibly attractive. And then there's like some other stuff that's layered in, but the way humans think about things, they don't like sum up all the value and then like compare that to the cost. They need like one thing that makes it worth doing the whole thing. And so like, I'll give you an example at Crane for us, that's hiring RTMs. For the cost of 1 year of a Crane membership, all you have to do is hire 1 or 2 RTMs through our talent pool and you've paid for your whole year of Crane membership. And all the other benefits you get through Crane are like gravy on top. And so for people who are hiring 2, 3, 4, 5 RTMs a year, they're like, where do I sign?

Right?

This is just, this is free money basically for me. What's the equivalent of that for this? Like, what's the one thing when you go to an owner, you're like, hey, here's our property management packages. By the way, we have an asset management program. And here's the, here's the thing that just makes it incredibly enticing and I feel stupid saying no to the offer.

Yeah. Alex Hormozi, $100 million offers, right? I don't know that I have that. What do you think it is?

I don't know. I, when I, when I get to thinking about this topic, I mentioned my one thing that makes me shy away from it, which is like, Why aren't I doing this right? Why am I not buying? We talked about that. Yeah, we talked about that. The other one is the further down the road we go here with this topic of like asset management, the closer we get to like a REIT. And at the end of the day, I'm kind of like, Mr. Owner, why don't you just let me buy this property from you and I'll give you like a predetermined stream of revenue like based on the value of the property and its financial performance. And like, just let me run the whole thing and you'll get like 10% on, you know, what you get, what I'm saying? It's kind of like at a certain point, why, why are they even own the property if they don't have the psychology to be a real estate investor? Just let me own it for you and you can take the stream of income off it and I make the delta between what I've promised you and what I'm able to perform. And And then kind of like that just gets you down to like, you know, real estate syndications and LP investors. And it's like, what am I even doing messing around with these mom and pop guys who don't even know what NOI stands for? Why don't I just syndicate apartments with LPs who understand the stuff and are more than happy to get an annual distribution and a phone call once a year? I don't know. I get all mixed up with like, like the scale of all the way down from just nuts and bolts property management to a fully hands-off REIT and like where do we fall and how do we charge and. I get really confused.

So in a limited partnership, you know, how do you access the— yeah, I'm out of my— it's above my pay grade, Peter, but I've thought the same things, but I just, I'm just not educated enough in the REIT world and limited partner world. Like our individual investors can access leverage that's very attractive, 30-year leverage. At fixed rates, right? Can we duplicate that in the REIT world? Like what's a return that somebody that just contributes their prop— let's say I'm just going to contribute my property as my capital investment into this REIT. So you're going to market to market, you know, and you're going to give me, you're going to give me shares. Yep. And how liquid is this? You know, how much control do they have about selling their shares? And is there a market to sell those shares? And what kind of a discount? And, you know, are we levering this the right way? Like, do we have to get large enough where we can actually get insurance companies to give us like 5% money. Like how does that work at scale and how do you bridge to that versus no, if we could really package this right, these investors, these small pot investors can get that, those 18% returns that are super uncommon for that, that level of sophistication to get, you know, 15% plus returns. Is that what we're doing? We're enabling that kind of return potential because Once you go to a REIT, what's the pref like? 6 or 7? And then at the end of the day, you're getting close to 10 or 12, hopefully. Why don't you just go put your money in the S&P 500 at that point? Oh, 'cause it's a diversification strategy.

Got it. These are all really valid questions. There's this interesting thing I ran across a couple years ago called a 721 exchange. Have you ever heard of this?

I think I have where you contribute your property.

Yeah. So it's kind of basically what we were just talking about where if you run a 721 exchange company, real estate investors can contribute their real property to this company, and in exchange they get like a pro rata share in the returns of the overall group. So it's kind of like you build your own REIT in a way. And that's sort of what I feel like our clients would be better off doing. It's like, just hand it over. You'll get a pro rata share of the pooled performance. We'll take a 1%, you know, annual fee off the value of the whole portfolio. And then you don't have to worry about, you know, toilet leaks and vacancies and insurance and everything, because we're just going to do all of that for you. And, you know, you get credit for the value of your home and you get to share in appreciation of the overall portfolio. There's part of me that thinks that would actually be better for everybody because one of the things I get to thinking a lot about, Mark, and this is very relevant for this discussion, is like, what percentage of your team's time is spent dealing with property owners? So in other words, if you owned all the properties, Mark, personally that you currently manage, how many fewer team members could you get away with having basically because of the savings of the account management part of property management? Have you ever thought about that?

Oh, absolutely. I've thought for years that the— this would be easy if we could just like get rid of all the owners.

Exactly. Yeah. I think it's around 30%, 30 to 40% overhead essentially of dealing with the property owners and their questions and their problems and their reporting and everything else. I think you're probably right. So I feel like going back to what I was saying, if they just contributed that into the 721 exchange, that would eliminate all of that spending, which could then be returned to them, you know, in the form of a lower management fee overall, and they would end up making more money. But then they wouldn't know what's going on with my property. See, that's the thing that they, they wouldn't be getting. And that you can retire on a lot of what's going on with my property answers if you accumulate enough of those, I think.

Well, okay, but what else are they giving up? This liquidity, and this is where I'm, this is above my pay grade. I don't understand how like you can, can you sell your shares in a private REIT? How liquid is that? Like what's the whole, is there a required, you know, I've heard of REITs where you put a portfolio together and it's a 5-year deal and everybody gets paid out and it rolls something, it rolls over. Maybe you can agree to rolling over with it or, you get paid out in 5 years. So do we just then agree to these fixed timeframes where people get paid out in these groups and we restructure things every 5 to 10 years? Or is there a marketplace to sell your shares in, in a REIT? I mean, if you go public with it, that's a totally different game, right?

Yeah. I'm not sure. That's a good question about the liquidity of these 721 exchange situations. Like how do you sell your shares? Basically, I'm assuming there must be some sort of like a buyback pre-agreed buyback for a discount at any time. You know, like the owning entity will agree to buy back your shares at some pre-agreed valuation, less a discount. In individual real estate deals, like syndicated, where you have a GP and an LP, and those are almost always like 5-year deals. And after 5 years, the property is sold, or they may elect to go another 5 years or what have you. So It's definitely illiquid, and you're— in theory, you should be getting like a premium for that illiquidity over and above, you know, a stock market rate of return, which is fully liquid. But owning rental properties is pretty illiquid in and of itself. I mean, compared to buying and selling shares in the stock market, owning rental properties is highly illiquid in the first place, and the transaction costs are absolutely soul-crushing.

There's this, uh, study I heard about psychologist department in the university did where they wrote a very simple program and the program was you walked into a room and you could open doors and move through this labyrinth of rooms and every 20 seconds the door would close. Any door that you opened would close after 20 seconds. And, but it didn't matter because you could just open it right back up and it didn't impede your ability to move from room to room if the door closed. And what the psychologists were testing was that, you know, how like the propensity for humans to want to keep all of their options open. And like, I think, I think there's something about the small individual investor that even though, yes, you made the argument and yes, you're right, it is illiquid anyway. I think there's some psychological need to maintain control and options.

Oh, absolutely. Yeah. And I've been speculating for the last year or two that our customer base as third-party managers, the type of person who owns rental properties is already self-selected to be the type of person who wants a higher than average level of control over their financial performance.

Right, because that—

which is bad for us. Well, yeah, that's it. And it's a data point. I don't know that it's bad. It does make it more challenging because it increases our costs. Yeah. Yeah. We're trying to be, well, just hands off, we take care of everything and blah, blah, blah. And but, but we're, we're kind of fighting against our customer there because the customer's like, dude, I bought a rental property instead of the stock market. You don't— you understand, I'm the type of person that wants control. If I was okay with just trusting the quote experts, I would have invested in the S&P 500. But I bought this property because I know this area and I know how to fix things. And I, you know, so we're dealing with people who are above the norm in terms of wanting control, wanting updates, and wanting the ability to impact their financial outcome by doing something themselves. Fixing a doorknob, selecting a tenant, whatever the case may be. And I think this has been the source of a lot of my personal frustrations with owning a management company because I don't really relate to those people weirdly, even though I do own rental property myself. And so I, I naively entered this business thinking that real estate investors all just want passive income, passive income, passive income. And to me, passive is like, never call me. I'll see you in a few years. Take care of this thing for me. I'm like, this is great. We can give them exactly what they want. We can fulfill their dreams of passive income. Well, it turns out most of our clients don't want that. They want the opposite of that. And you see that in the PM Trends report and the surveys that we did there looking at what real estate owners and investors want from their property managers, and they want control. That came through so loud and clear in those responses.

You know what? So I, I wanna speculate. I would just want to speculate on that for a moment. I think my gut tells me that over time, the need for control diminishes for most people as trust goes up. I think so.

Yes.

And so I also speculate, and I would love to see data on this. I also speculate that most landlords don't make it past 7 years. Maybe not even past 5 years. I would love to see the data on that because I think it would, I could, it could be really compelling. It could be really compelling data to show, hey, by the way, you've just engaged in a journey with us to hopefully build a $4 million portfolio. Your biggest enemy is you. Your emotional instability is your biggest enemy. We acknowledge and recognize that we're going to help you if you'll let us. And there's an 80% chance you're not going to make it past 5 years. So given you're the problem and you're not gonna make it past 5 years, let's agree that this is the nature of our relationship and we're going to try to help you and earn enough trust over time that you will be hands-off because that's the highest correlation with success in the long run. You know, something like that. I would love to have that kind of a kind of in-your-face, like deliberate discussion with somebody. And then I would love to get so good operationally. Sorry if this seems random, but I would love to be able to have, like at my fingertips, be able to have either a person or a means within my organization that anytime an owner starts flaring up irrationally, you know, I tweeted recently, there's no such thing as an irrational or unreasonable owner or resident. And I think that's true because when we, when we attach to that idea, it forces us to take full responsibility for gaining influence any way we can. Okay. So that, that's the, but setting that aside, when an owner responds irrationally to something, right. And they're spinning up, they're getting triggered by something. I would love to be able to furnish them with a play-by-play detailed report of exactly detail that happened in the item that they're flaring up about and be completely transparent and deconstruct everything for them. And I've done this a few times. It took me a couple hours to put together, like, every— I had to call the vendors, I had to call the tenant, I had to call, like, I had to listen to phone calls.

I had— we're dealing with one of these right now.

Yeah, you know what I'm talking about. But when you spend the time putting the case together, it's a really— it— the insights are powerful. I would love to on command have somebody that loves putting those cases together and does it actually even before something flares up. They do it on a regular basis proactively to audit how good our competencies are in our operations. And when we find infractions, we voluntarily disclose to the owner and reimburse them for any losses due to our incompetence. Like, how incredible would that be to run that kind of shop so that not only internally do we have the utmost confidence, but we inspire absolute lights-out confidence with our owners This is who we are. You have absolutely no reason to flare up here. We're going to get to the bottom of this. We're going to reimburse you if we actually were incompetent.

And let's go.

Let's get you past this for the first 5 years.

Yeah, a couple thoughts on that. I've done those deep dives before and we've done them as a company several times when an owner had a big problem at a property. And I always find them in the end to be deeply unsatisfying for a couple reasons. One, I usually find that we made mistakes, multiple mistakes that are so, so painful for me to see. Yes. And just make me feel really foolish.

Yeah, thank you.

I'm so glad I'm not alone. And the other thing that I find really painful is even if we don't find those mistakes, or even if we do and we own that part of it, the owner is never, never responds in the way that I think that they should when we do one of these deep dives and share it with them. No, they never do. They always just find something else to complain about or they say, yeah, but remember last year when you're just like, oh my God. Like it just never, I'm like, all right, here's the slam dunk. There's a 3-page PDF. We've got pictures. We've got trip, you know, vendor confirmations. It never gives me the resolution that I'm looking for.

There's like some deeper issue in that case. I've done it before where I, it was refreshing. The owner's like, hey man, well, wow, thanks for being so transparent. Thanks for going. You are even admitting your own mistakes here. And I think, I think it can be a trust-building exercise. I think obviously we've all had relationships that have just gone too far, too, too negative, too long, too far. And we have to divest and it's okay. I think in my opinion, to be really candid with owners and say, you know what? Hey, it feels like there's too much emotional baggage that I've lost too much trust over time. That I can't even ask for enough of your support right now to try to regroup and move forward. I think it's best that we part ways. I think highly of you.

The problem is when you do that during one of these situations, that just— it to them, they're like, they're like, oh, and yeah, okay, yeah, now I see what you're doing. Now you're gonna fire me and you're trying to hide your mistakes and you're, you know, it just even flares them up even more and gets them cranked up even more. All right, but anyway, so the other thing I wanted to comment on You know, this like getting them to the 5 years thing I think is a great discussion. And I love the content that you've put out. I know you've put out recently, but I know you've also been talking about it for years, which is like the juice really comes like after year 5 and year 7. If you look at all kinds of things from like the appreciation curves and the principal paydown, interest versus principal on a mortgage, like first 5 years is almost all interest and You're so right about that stuff. And you know, the transaction cost is another thing. Like the more years you own it, the more years you can amortize those transaction costs over. And that's exactly how I personally think about investing in real estate is just to set it and forget it. You know, what's the old cliché expression about real estate? Like you don't wait to buy real estate, you buy real estate and wait. Yeah. Or something like that. It's so hard to communicate that to property owners. In a way that I think resonates with them for whatever reason. We're gonna do it. Like how do we do it? Yeah. And I think you're, you've got great language about this.

Yeah. It's not just the language, they have to see it. You're gonna love a reel I just, I just put together where I got up on the blackboard with a chalk marker and I did an Y and X axis and the Y was the money and the X is the time. This, you can see it in your brain. We, we were in La Jolla recently and I explained to you You know, the visual.

Mark, you need to put together like a productized service so that you can, like, instead of just sharing this with your clients, you need to be sharing this with every single rental owner at every single management company in the United States.

Absolutely. Well, let's—

yeah, absolutely. Your messaging around, you know, the 5-year thing and the principal paydown and the transaction costs and like the, you know, we want you to get to $5 million and, but you're your own weakest enemy. Like everything we've been talking about today, pretty much. Yes.

Let's do that.

You just need to wrap this up. In a way that I can deliver your message to my clients.

I'm telling you, I want to write a book with you, Peter. I need it.

Are they going to read the book though?

Well, I, whatever, whatever, whatever, a program, a course, whatever, something, we'll sell it. But I think there's something really powerful. I think again, lineage and blanket are on the forefront. If we can show owners, um, did you know that in rock climbing, you know, they call it the different phases of the climb, the pitch, right? There's different pitches that you go through. Did you know that in some pitches, if you don't move through it quickly enough, you will fall off the face of the mountain? Like, there's no resting point. I feel like the first pitch of owning a rental property, the first 5 years, it's like head down, guns blazing. Like, we have got to get you through this. But by the time we get to year 10, it's going to— you are going to be so excited.

There's a couple of these. There's a couple that I could identify. One is their first turn. That's a pitch for sure that they need to hold, hold strong, hold firm.

No, they need to move through it quickly or they'll fall off. That's what I mean.

Yeah, yeah, that's what I meant to say. Yeah. And then the other one, you know, you said like maybe the first 5 years. So yeah, we could probably identify a few of these and, and pre-warn owners of what to expect.

Exactly. Yeah. And, and if you can give them visuals and you orient them to this and you can like It just gives them a fighting chance. If only 20% of landlords make it through the first 5 years, but we put together incredible content and we get that up to 35% or 40%, what a huge win that is.

You could get halfway there by just articulating that one statistic to them and just say, only 20% of you are going to make it to 5 years. And be like, oh hell no, I'm going to make, you know, get there because our competitive nature going.

That's right. Yeah, that's right. And I think, so you and I, I know we're going a little long here and I got to jump to another meeting. This has been fat. I love We should do this every month, Peter. But one thing that you said to me was last time we talked is I can't go through 93 things in the onboarding process.

I'm still really hung up on that, by the way.

I, I know, I know. Can't, I can't like orient the owner to every scenario that's gonna go wrong and like basically prime them to use a sales term. I, you gotta prime and set the expectations for everything so that when we get to that moment, we're like, hey, remember we talked about, they're not gonna remember any of that stuff. They're not going to remember any of that stuff, but they're going to remember like maybe 2 things. Number 1, you know, here's the visual of where you're at. People remember visuals and here's what this looks like the next 5 to 7 years. Number 2, the only thing I need from you, and I need it more than anything else, is your support. I need you to look at me as the subject matter expert. If you know where you're at and where you're going, and we're aligned with that, and you trust me as a subject matter expert. I have to undergird that. I have to prop that up with accountability, transparency, owning the outcome, and the ability— I'm thinking the way I'm framing this for myself right now is I have to be able to, at any point, deconstruct anything that went wrong at a level of detail that inspires and blows away the trust and the confidence, which is so painful for the reasons we just outlined, but also so important to get owners through that first 7 years. I've never met anybody that's owned rental properties for over 20 years and regretted it. They regretted not buying 4 times as many. Once we help people zone in on that and just those 2 things, here's a visual of where you're at, where we're going, and I need your support. And you have my full commitment that at any point we're going to deconstruct everything, be totally transparent. You might find that you're not cut out for this. We might find that we don't want to work together, but we're going to give it everything we got.

Yeah, there's definitely something that idea of like summing up all the categories of things that can go wrong and grouping them into like 1 or 2 or 3 large things that you can articulate during that kickoff or during the sales process. So I like where you're going with that.

I think it's money. I think if we escrowed every single owner's money, the stuff that they should be saving for the next vacancy and the repairs, it smooths everything out. And if you could package that into an asset management program where that's actually part of the premium service they're paying for, That's, I think that's brilliant.

I think there's something there. I think there's something to escrowing the money for reserves for replacement and turns combined with paying the mortgage. And I mean, ideally you would sort of like get them out of escrow. So you are controlling the, I mean, everything we're talking about is more money in my trust account that I can— There you go. That I can—

The enterprise is going to give me a return on as well.

Possibly or possibly not earn interest on in various forms. But yeah, there's some really interesting pieces and parts here. I think the financial, the full picture financial accounting is really kind of a next generation asset management idea that hadn't really clicked for me until we talked through this. So there's some little nuggets here that I think are the beginnings of something that could turn into what you articulated, which is a totally differentiated offering that is not property management, but it's a totally different set of values and a totally different way of charging for it, which is, that's basically the definition of like, what's that great book that everyone's always recommending? I can't remember, but basically it's like a differentiated product offering. Blue Ocean. Yeah.

Blue Ocean. Yeah. Yep. Yeah.

Category of one category design.

That's what I meant to say.

Yeah.

If, if somebody goes to your website and they see what do you charge for property management? Well, we don't do property, but we do, well, we do asset management. It's 1%. What? Mm-hmm. 1%. Yeah. I'm intrigued. I gotta call, I gotta find out. Look, look at all that you're doing for 1%. It's 1% of the assets under management because we're getting you to $4 million. We're motivated just like you are. It's lights out. We're gonna take care of everything. Nobody does this, by the way.

Yeah. And I believe a great property manager can swing the value of your asset by a couple percentage points annually through good management. Absolutely.

And you compound that over 20 years. Yep. That's tremendous.

Tremendous, tremendous value. All right, Mark, this was awesome. I'll try and get this up on the feed as soon as I can. Thanks for jumping on last minute with me.

Yeah. And see you in Phoenix next week.

All right. See you then. I hope you have enjoyed this episode. If you like the show and want to get connected to the community, you can follow me on Twitter @PSLohmann and subscribe to my email newsletter on my website, peterlohmann.com. I try to share as much valuable property management content as I can on a regular basis. Thanks again for listening and have a great week.