Balancing Real Estate and Business in Today's Economy

The benefit of real estate was it was the debt was so easy to get and the tax advantages were so good on real estate that it just made so much sense from a cash on cash return. And one of those is absolutely gone in terms of debt being easy to get and being inexpensive. But let's say the tax things are still on the table for now. We'll see how long they stay there with changes in capital gains and those kinds of things. But let's assume that they stay there. The what we have seen is just the opportunities that are on the market and the volume of buyers that are out there, including by the way, retail buyers. So people who just want to buy a house to live in it. Right. They are there and they're always going to be willing to spend more than an investor is because they don't need to make margin on the sell side.

Hey everybody. We are here with another episode of.

Business Launch with your hosts Ryan Deiss.

The inimitable cannot be imitated. Ryan Dice and me completely imitable. Roland Frazier. Good to see you Ryan. How you doing?

I'm great. I loved and I. It's worth going to YouTube just to see. I'm pretty sure that was your son. Ryan Fraser was behind you at one point and you saw him crawl behind, behind you. So he's like trying to not be seen but you could definitely see him. It was amazing. So I'll just say if you are not subscribed to this channel on YouTube, it's worth doing it. Just for that scene. Just for that scene. But no, I'm, I'm, I'm amazingly great because I got to see that. So thank you all for that level of entertainment.

You know, it's hard to engineer these stunts on a regular basis to entertain everybody. But thanks to Gemini, GPT and Claude were able to put in there and say what would be the most entertaining thing we could do and they said have somebody related to somebody that's on a podcast crawl under and behind a pool table.

This is going to wind up like being in a talk of some like podcast growth hack or something like that at some event. That's we figured it out.

That's the subliminal advertising. I was talking to you earlier. So I was out in my driveway taking pictures of my car which one of our friends said he wanted to buy.

Oh really?

Yeah, yeah, yeah, yeah. My, my, my leases are up in August and so I have been kind of thinking about that and I was talking to, to J. Cron actually about, about it and he was like, he had been kind of telling me over the last probably two years, saying, hey, listen, when it comes up, I. You know, if you're not gonna buy it out, I'm. I'm interested.

Let me know.

And so. So I was taking pictures and sending it to him, and as the. And now I have two new cars.

Before we move on, I need you to absolutely sell it to him, because I just want to screw with him relentlessly. Because after he buys, you'd be like, oh, couldn't afford a new one, huh? Had to go with rolling, sloppy seconds.

Yeah. Yeah.

And I just, like, I don't. By the way, I don't mean any of it. I just want to screw with them so they can't get the full enjoyment out of what will almost certainly be a significant investment. You know why? Because that's what friends do for one another.

Yeah. That is what friends do. My son Ryan and his friends suggested that we buy something like Lindberger cheese and put it underneath the. The holding, you know, like under the hood where it could be warmed over time, but near an air conditioning vent so that it would, you know, kind of ruminate through the car. I thought that was a good idea, too.

You could also just, like, hide. I don't know how you'd get it, but, I mean, let's say you. You were to find just some meth laying around. Okay.

Dark web. I would go to the dark web.

Yeah. Hide meth somewhere in the car and then put in an anonymous report so that the police come and search it. It would be hilarious. Like, that's really funny, Zane.

These are pranks that are good to play on your friends. Good pranks.

I love playing.

So anyway, I was. I was there, and a couple walked by who I think, you know, Bob and Delerine, who are agents that are real estate agents here, primarily focused in. In the area that I live. And I hadn't talked to them in a while. I mean, actually, they've been really busy, and I have, too. So I hadn't probably seen them in maybe as much as two years. They helped us sell one of our houses back right before all the prices of houses went through the roof. So, you know, and then that house sold for a million dollars more than we sold it for a year later. So that was, you know, that was one way. One more way in my book of ways not to make a million dollars or more that. That's coming out soon. But anyway, I. I started talking to him, and I said, you know, hey, what's going on? And they were talking about what they were doing and everything. And then I said, so, yeah, I mean, I'd love to get another place because I'd like to have a place that I could just have my studio and, you know, stuff in. But I don't want it in my house because it's, it's going to take a, it's going to be too businessy, too industrial. It's not going to look pretty. I have wires everywhere and all that. But, you know, I'm, I just got, you know, I gotta get. Interest rates come down, you know, or house prices go down. I said, I said, what do you think of this? And they said, no, this is the new normal. Now, I will tell you that everyone who's in construction and real estate always thinks prices are going up and never going down, in my experience. So when things are at their peak, very often that's how it's going to be forever and it's going to continue to grow. So I don't know if that's, you know, what will happen or not. But they said, you know, this is the new normal. The prices were suppressed before. I think that what you generally hear in the market bears that that's probably the case. So what I started thinking about was, and we were talking about business versus real estate. And I just like, to me right now, as expensive as it is, because they were talking about, they, they like to say it's like illegal waterboarding to get approved for a loan for real estate these days. And they, they said, like, they said.

I've never written so many explanation letters.

For every single thing that I bought over the last year. It's kind of crazy.

What is that? Is that with investment property specifically? Or is it, is it for your everything, your main homestead? Everything.

Everything. Yeah.

Is this because just of all the, you know, going back to 2008, 2009 shenanigans? Because I feel like, okay, I can tell you this. I know even just getting a business bank account fundamentally requires like a proctology examination. I mean, the KYC laws and all of this other stuff is so arduous just to open a freaking checking account. So I can't even. Thank God. I haven't, I haven't bought a house in, in a while. So I haven't had to go, go through this. But so that makes sense. I mean, it, it doesn't make sense, but it makes sense that it's happening.

Yeah. So. So what, what I was, it just kind of got me to thinking and you and I were chatting about it briefly before we decided that we would talk about this on the show. But it's kind of interesting because really it's twice as expensive because of interest rates more than doubling to get half as much value because the value of so many things have doubled and you know, or, or at least increased by 50% or more over time. So you're paying double the rate to get half the stuff. So effectively you get a quarter what you used to get. So if you think about that and.

And then you say, well, what are the other things that I can do to invest in?

And I know that a lot of our friends who are in the real estate education business, the real estate flip flipping business, the real estate wholesaling business, are having a hard time because there just aren't the deals out there and because money's too expensive and because there's not enough profit in the house because everything is selling for so much and they can't buy it at those high prices and then sell it for enough more to make it make sense to have held it and fixed it during that time. Not to say there's no opportunity ever, because there's always opportunity, but, but it's significantly less than it used to be for now. So during that time, to me, it's like, what are the other things that you can do with your money? And it kind of comes back to, I have not seen that happen with businesses. In terms of buying businesses, there are still lots of motivated sellers who don't have a, a mature, efficient market full of buyers ready, willing and able to buy that are sitting there looking for the opportunity to bid for the right to buy their business. And so like, if I'm comparing the real estate investment options to the business buying options, and I'm in both, you know, so I like. And you are too. Right? So I like talking about it with somebody that's not completely biased. It just seems like if you're looking for stuff to do right now, I mean, I am having a hard time finding real estate that makes sense to do, and I'm not having any problem at all finding business deals to do. So I wanted to kind of get your thoughts on that.

Well, really, you know, I've done, I've done some real estate deals. The, the thing about real estate is you either need to buy and hold and just wait for the market to go up, as it generally does over a long enough period of time. If you, if you have any sense of what you're doing and you have patience, it's really hard not to make money in investing. I mean, that's what Warren Buffett has, you know, has proven. And not, not to say that I'm.

Not really about the making money as.

Much as that it costs so much like if you look at the efficiency of your capital to get a return on.

Just like the cash on cash return. Yeah. Is a return on invested capital. Right. That's kind of what we're talking about. And that's the issue right now and has always been my issue. I guess the benefit of real estate was it was the debt was so easy to get and the tax advantages were so good on real estate that it just made so much sense from a cash on cash return. And one of those is absolutely gone in terms of debt being easy to get and being inexpensive. But let's say the tax things are still on the table for now. We'll see how long they stay there with changes in capital gains and those kinds of things. But let's assume that they stay there. The, what we have seen is just the opportunities that are on the market and the volume of, of buyers that are out there, including by the way, retail buyers. So people who just want to buy a house to live in it. Right. They are there and they're always going to be willing to spend more than an investor is because they don't need to make margin on the sell side. They just need a roof over their head. And so that's what you're competing against in real estate. You're competing against a retail buyer.

Now, by the way, we're just talking.

Really residential real estate here. We're not talking about commercial and multifamily and all that.

Sure, yeah. I don't know anything about, I mean, full disclosure, I've done some, you know, residential stuff. I haven't done much in the way of, of commercial, multifamily or anything like, anything like that. But I have friends who, who do and they're saying similar things, especially from an interest rate perspective and the, the cost and you know what it takes going into it, because what you actually have, there is less demand. You have less people wanting to occupy as much space as the world has gone a little bit more remote as, as belts begin to tighten. So in commercial you've got all the same headwinds of interest rate environment, but instead of this influx of demand, you actually have a pullback of demand. So there it's like, so I don't know, I'm not saying it's like, like we already disclosed this is not our area of expertise. What you're seeing though in, in business buying is, is the opposite is true. You can find deals that are out there because so many of the real estate companies, the institution, I'm sorry, the private equity companies, the institutions, they've pulled out. 2000, 2023 was one of the lowest, lowest private equity investment like deal flow times that we have seen in decade and a half. And there was this whole prediction. The Wall Street Journal ran this article about how 2024 was going to be the year of private equity investments. And it really hasn't come true. Why? Why hasn't it come true? It hasn't come true because that Wall Street Journal article was speculating that there were going to be rate cuts, there were going to be three rate cuts this year. Well, guess what, we've had exactly zero rate cuts now. Jerome Powell just came out and said.

Six rate cuts is what I, what I saw everywhere. So going to be 6 rate cut. I think maybe even the Fed said it. But six rate cuts was what everybody was saying. And we're almost halfway through the year as we record this and it, I mean, they're going to have to hurry up on that.

And the recent Fed meeting, Jerome Powell, the economy actually got, stock market actually got a surge because all he said was we're probably not going to have another rate increase, right? So we now have regulated since, since that Wall Street Journal article came out saying, oh, 2024 is going to be the year of private equity at the end of 2023. We've now regulated to please love a God, just don't keep raising rates. We'll be happy if you do that. That tells me that the smart money is not expecting rate cuts in 2024, which tells me that institutional investment is going to look a whole lot like it looked in 2023, which tells me that you're still not going to see a lot of private equity throwing money at private businesses, which means there's still going to be opportunities for people who know how to do those kind of deals. So yeah, I think given my general lack of knowledge and where interest rates stand right now and the demand that's out there in real estate. I'm not doing any buying in real estate. I know there's people making money. I know there's people doing fine. There are people who will buy high and sell higher, right? So yes, it's high. They've got the capital and cash flow that they can buy now and they can wait five to 10 years and it will almost certainly be higher. No guarantee, but decent Enough bet. The challenge is there's not enough margin there. So you got the buy high, sell higher model. You've got the I'm going to go in and I'm just going to improve the I'm going to value add model. Well, there's not enough margin anymore. And the cost of materials and labor is also high. That there's not even enough. If you're willing to do a value add in real estate, but in business, man, you could do some value adds for nothing, like just your brains. You go in there and you improve the marketing. You know, you do some, some not even advanced financial engineering. You just go out there and make some tweaks to who they're paying and how they're paying and when they're paying and create some margin and some cash flow. So the opportunity to value adding business is so much greater. And then kind of the third way that people make money is they just find a deal that nobody else saw. The diamond in the rough. And in real estate, it's really hard to do right now when everybody's looking. And it's really hard to do right now when all the sellers are educated on the fact that they got what people want. Even if it's a fricking shack. Yeah, somebody's going to buy it. Somebody's going to want it, probably four or five. On the business side, nobody wants to buy companies. So if you just believe in contrarian investing, I would say that now is definitely the time. And I was worried that this year private equity was going to come in with a fury and just gobble up. They're not. They won't. I think we've got a window here. I'd be doubling down on investing in businesses.

Yeah, yeah, I agree with you. 100. And the financing is so much more frequently seller financing these days than it is in real estate and at significantly more favorable rates. So there's all kinds of things going.

Yeah, you bought your house, correct me if I'm wrong, seller financing, right?

I did, yes.

What is the chance that you get that deal now?

I, I mean, you'd have to have. Because think about it like the house had sat on the market for, I want to say, like 572 days or something. Like it was, you know, almost two years that, that they'd been trying to sell it. Now, of course, they could have lowered the price, but they weren't, they weren't asking, even in that market, a crazy price. It was, it was a good, it was a good price. And you know, and then you Also think about like, what can you get on your money and you know, how motivated they are. And the people that were here, it's actually this house. Right. The people that were here got offered a job that they kind of had to go to. And then I think it was just like, you know, well, we want to get a house up there and we need, you know, we need to do something. So it worked out well. But yeah, it was a 10 year interest only loan. I still have four more years, you know, at my. Roughly 3% before my, I have to pay the, you know, the amount that was financed. But it's, I gotta think you can find that deal. But it's not going to be like. Because why wouldn't. Let's say that just for, you know, just for argument's sake, let's say you find a piece of property and it is $3 million and now, and that was, you know, three or four years ago and now it's six, let's say it's doubled. Could you find the seller financing on the six like you could before?

Probably, yes.

For the same reasons. Right? The same, you know, well, I'd like to make, you know, but, but it's going to be higher interest. It might be instead of 3%, maybe it's 6% because they have a hard time getting 6. But 6 is kind of the risk free right now. So it's probably nine or ten.

Right.

Which historically over all of real estate is still not horrible, right? Yeah, but it's not, it's three plus times what you were paying just a couple of years ago.

Yeah, a couple of years ago. That would be considered a hard money loan.

Yeah. Seriously, right? Yeah, yeah. So, so I think that that's, I guess that's my, you know, my point and my, my issue is just that when you look at how much more it costs now than it cost before, it's, it's really hard. If you do take a broader perspective and think, you know, well, their rates were 16. I remember my mom got a 16% mortgage back in the 80s. I think it was, you know, early 90s. And, and that's just what they were. They were all, you know, 12% was good, 14 was kind of okay and 16 or more was, you know, was up there. So, so the, the 6% still is pretty good if you can get a 6% loan and you probably can make money on it. Because people have historically. But when I look at that, plus the ridiculous increase in prices, like if it was just that rates had gone to 6% that'd be fine even if the prices had stayed the same. But the thing that just constantly blows my mind I still can't get my head around is the lack of economic tradition of that if interest rates go up, then prices of homes go down because they become less affordable. No, no, no, we're going to double the prices of the houses and double the price of the rates and still have it go up. That's what's really, really tough to, you know, to come to terms with. And you know, of course you're not.

Seeing that in businesses. I think that's so not even the biggest distinction. You're seeing more, you know, creative financing getting done. You're seeing still plenty of deals that are on the market and you're seeing less buyers and specifically less, less cash buyers coming in with a lot of debt. So it's definitely, and that's why I asked about your house. Like, you got a great deal. You're obviously one of the best in the world at doing creative financing structures and things like that. But I think even you would have had a hard time pulling off the deal that you pulled off, which even for then was an awesome deal. I think for now it'd be almost. It's hard for me to imagine that house sitting on the market at that price for as long as it did. It snapped up.

Yeah, right. And if it did, if it did, it would be a house that was, that was worth, you know, in these times. Right. It would be, it would be twice as much and the cost for me to finance would be twice as much. Which still, like, if I could get a 6%, 10 year interest only loan on a house on, on twice the value that I paid for it before, that's, that is market now, right? It's within the range of market now. That's still probably not a horrible deal if you can carry it. But, but it's not, you know, it's just in dollars. In terms of dollars, it's like this was amazing. You know, it's, it's, it's less for me to own this than, you know, than it is for most people to pay rent, you know, and, and that's just crazy. So that that deal is not out there at that price anymore. It's probably out there at twice the price, you know, and, and it's an okay deal. It's, but it's, it's way less affordable, I guess, in terms of just dollars.

So if you're an investor and you, you want to do more than just kind of the Stick, stick your money in a, you know, in a, in a fund, you know, or somewhere in the stock market. If you want to be a little bit more active with your investment, try to seek a higher return than, than what the market will deliver. You don't just want to have it all sitting in cash. Real estate was kind of the, the place where you went, you know, then maybe after that it, you know, became Bitcoin and Daler and heart collector plates and stuff like that. But the one that, that everybody, that, that most people don't think about is private companies. And yet that, if you, if you look at it, that has actually created. People talk about, about real estate being the largest wealth creating vehicle in the world. Sure, maybe across the board. But when you look at the people who, who have the most money and who built the most wealth, most of them are in private equity. You know, most of them are running hedge funds and they're, and they're also buying private companies. It'd be nice to be like a, you know, a Buffett to have the capital to go out there and buy public companies. But this is kind of the opportunity and it can be done. So obviously we talk about this, you talk about this a lot. I don't want to turn this into, you know, a, you know, pitch or anything like that. But any, any tips that you would give people aside from maybe showing up for the next epic challenge when you do that? Any tips for how to, how to think about it?

Yeah, I mean, yes. So yes, we do have a cost challenge to take. That I think is pretty good foundation for all of this@getepichallenge.com but just generally, conceptually, I would say that if you're thinking about buying real estate, look at the return on your capital that you can reasonably expect over the next three to five years and compare that to if you were able to acquire a business. And businesses are really just assets of income streams. If you think about that, they're an income stream that you can acquire generally at a discount. And so if a business is profiting at $400,000 a year and you can acquire that asset for, let's say, nothing out of your pocket. Nothing out of your pocket. Right. Which is very common. Or you can do it for, let's say 25%, if somewhere between nothing and 25% should cover almost any acquisition of a business. So now you're basically buying a cash flow stream of $400,000 in profit a year with a hundred thousand dollars out of your pocket. That's a pretty Good return on your money on a, on, you know, any, anybody's level. Plus if you go into growing the business and optimizing it, because most of them are run by people who have nothing, who have started a business because they are accidental entrepreneurs. They didn't intend or plan to be in a business. And the truth is they're not really even entrepreneurs. They're just self employed people. They basically said, here's a way I can make money without working for somebody else. I like that. Now they're doing it. They didn't know how to do pricing strategy, they don't know how to do acquisitions, they don't know how to grow the business, they don't know how to market effectively. They don't even have a customer list, a whole lot of them.

Right.

There's so many optimization angles to increase the value of a business as opposed to like increasing a house. It's basically paint or remodel. If it's a commercial property, then it's raise rents. Re do the property so that you can upgrade it so that you can raise rents. Maybe you can find some incidental income by adding laundromats and vending machines and things like that. But there's not a lot in business. There's hundreds of things that you can do to increase the value. And very, very often the simplest of all of those is simply raise your prices. Because most people who own businesses haven't done it or were afraid to do it for the past several years. So I think thinking about just coming in and seeing if you've got somebody who wants to move on from a business, then they're a motivated seller. If they have tried to or don't know how to, then it's very likely that they will finance for you. So you won't have to do that yourself. You'll probably not pay what it would be worth if it was completely fixed up and made right for market because they don't know how to do that. And therefore you can not only come in and buy an income stream at a discount, you can also have an asset that with just a few tweaks, you know, the proverbial coat of paint can be worth a few times more than it is when you buy it. And if you do that even once or twice, you know, once a year, once every couple years, it's because businesses sell for multiples of profits and it's very easy to get double digit plus returns and even triple digit returns on your capital because the markets are so inefficient for sellers. But a lot of that inefficiency is because the market has this floor. And until you hit the floor, you're not going to find a bunch of buyers who are willing to pay much for it. Once you hit the floor, there are lots of buyers. And so it's kind of just basically arbitraging the, you know, the sub floor acquisition with the above floor sale is really what you're after. Hopefully that's in a nutshell.

I think it's a great point. Like what you're basically saying like right now in real estate, I said before and I, and I do kind of mean it, if you've got a shack to sell, someone will buy it. Right now in business, unless it is perfect, there's almost no buyers for it. Right, right. And certainly not at the institutional level. Right now there's a buyer for every address in real estate pretty much, with exception of like very rural areas or where there's not a lot of humans walking around. But in most major areas and there's.

No supply, that's the other challenge. Like our, our inventory is about 1/5 here in San Diego, what it was four years ago. So.

And we're not building houses.

We have like, we have a real estate brokerage that is making less than it made a couple of years ago. Not because prices are down, because they're up. Right. Not because there's not a buyer for every address, because there is. It's just there aren't the addresses to sell. Right.

Yeah.

Because we have done not a problem that we have in the business world.

Right. Because in 2020 and 2021, we saw the largest surge in new business formations that we have seen in the history of these United States of America. Right. The largest surge of businesses occurred in 2020 and 2021. A lot of them didn't make it, but a lot of them did. And now you're coming up on a couple years where a lot of these people are wishing they had some help, are wishing they had another investor, are wishing they could just get out and maybe, you know, go back and try to do something new. So I don't know. I'm looking at, I'm looking at real estate, I'm looking at private business investment, and just everything that doesn't work about one is working in the other. So if I were you, I had any entrepreneurial business savvy whatsoever, I'd be seriously looking at some of these private companies as investments and acquisitions. So that's what we're doing.

Awesome. Well, hopefully you guys found that Helpful. If you did, please share it. If you didn't, then watch another episode and I bet you'll find something there. Great chatting with you, Ryan. We'll see you guys next time on the next Business Lunch.

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