How to Build Market-Resilient Wealth and Invest with Purpose

0:00There were so many reasons we passed on these deals. We have a 27.2 diligence checklist. I can send that out to your audience if they just reach out to me. We can give you contact info if you like. — That'd be great. — But yeah, I mean one is lack of investor alignment. I I listened to our director of investments today tell a story of one deal that if you looked really really closely at the deal they wanted us to invest I think it was $12 million in this deal they were investing four or 500,000 of their own money they were taking $1.5 million in fees at closing and they the total of all the fees and all the other

0:48Discretionary costs if you looked at the very very fine print that was hard to find was something like 23% of investor equity and this is a well-known sponsor I mean that you might have heard of and you know a lot of investors again and it would have been me when I was a speculator 20 years ago 25 years ago would have done that deal but once you look really close at the fine print, you know, you would never want to do that deal.

1:21We look at that. We look at prison, not prison, we look at criminal record, could be prison record. We look at deep we do death by Google if and that's kind of self-evident what that is. We do reference checks. We check with all kinds of people who they didn't give us references on that we find online that might have invested with somebody. We check them out. We once spent $13,500 doing a very very deep dive background check on somebody and that came right out of our pockets, you know, because we had some reason to believe that there were problems.

1:58We do net operating income audits. That's a $9,000 per asset, you know, typically per asset audit where a third party goes in and audits where the cash flow is really coming from, where the expenses are, just to make sure that everything is what they say it is. And these are things we do when we're way down the line. You know, we we usually have said no long before we would ever get to a spending a $9,000 on an audit, but we do, you know, we look very closely at the debt.

2:34We and and we'll pivot and and later, Kirby, I'll tell you something about the an example structure of a deal, but we we look, you know, will they be willing to live with our terms on how we come in as an investor? We look at their skin in the game, of course. We look at their track record, their team. We go meet them in person at a scheduled meeting at their headquarters. We go see the site. We sometimes do unscheduled visits to other sites that they have to see if they're really running the way they say they will.

3:07We do everything that you would do as an investor if you had the time, the resources, the knowledge, the tools. We do that for investors and of course we're investors in our own deals as well. — So smart. I mean like when you're putting that much money into a deal you want to be sure and and so what were the maybe metrics or the the the benefits of the five that you decided to invest in that made those worthwhile?

3:43Well, you know, we this is kind of like morphing a little bit into like almost a sample deal here. So, we were investing we have eight funds now. We opened number seven and eight this month. And the earlier funds all invested in common equity. And honestly, we didn't really think much of it. We didn't think that there really were many other options other than investing in their debt. And we didn't really want to do that. But in the middle of the you know March of 2022 marked the beginning of 11 different interest rate hikes in I think a 16-month period.

4:25And you know Warren Buffett said sure a rising tide has lifted all boats but someday that tide's going to go out and we'll see who's skinny dipping. And of course a lot of people were skinny dipping and we found that out since the interest rates went up. So we with these, you know, rising interest rates, we know that a lot of good deals weren't getting done. A lot of debt, a lot of banks were skittish, lenders were really skittish. And there were a lot of good deals that could have gotten done.

4:57And what we started noticing was this gap. You know, let's say that it in the past it would have been a 75% loan to cost you know, debt and then 25% in equity would have come in. Well, instead now for either because of the higher interest rate or because the lender was skittish or both, you know, they might only be able to get 55% debt and maybe the investors would say, you know, really not going to come in at 45%.

5:30They couldn't they didn't have enough investors in other words. So we would come in and we we we started filling that middle gap and this is not rescue capital. I want to be really clear Kirby. This is good deals that just needed extra capital. And you know it could be mezz debt which we never did mezzanine debt. We did preferred equity. And so all of the five deals that did get funded were either preferred or JV or we'll call it JV hybrid equity. Preferred equity sits in the middle of the capital stack.

6:03It's got joint it's got control rights. It's got force sale rights, budget approval rights. I mean it's it's however you structure. It takes a whole lot of legal structuring to get these deals done. It basically means that we're in a protected position in the capital stack. If the deal goes south when it sells and let's say it loses 5 or 10% of its value, well, all that comes out of the people in first loss position, which would be common equity investors and the GP, which is where we used to invest, but we are protecting our principle hopefully by being in the middle of the capital stack.

6:46And so preferred equity again typically would have let's say something like an 8 n or 10% current pay which was debt-like and then it would also have a compounding and acrewing upside which might be another 5 6 7 8% running in the background and that was equity like but it had a cap on it. In other words, if the deal had a 40% annual return, we'd only get that 16.5% we negotiated.

7:17If the deal had a, you know, let's say 10% annual return to the common equity investors, we would still get paid what we had negotiated. We didn't like that as a permanent solution. We thought it was a good solution. We still do those deals in our income fund, but for our growth fund, we thought, man, we would really like to capture the upside in these very best deals. Number one, and number two, a lot of the operators, the best operators are like, we're not going to pay you 16, 15, 16, 17%.

7:53And we get that. So, we developed the idea of doing JV hybrid equity. JV hybrid is a hybrid between preferred equity. So it has the downside protection common equity. So it has the upside that common equity would have. And so this JV equity doesn't have the current pay like 8 9 10%. But it does have pay out parapu. In other words, at the same rate or the same level as the common equity investors.

8:24Yet it does have a lot of downside protections. It's still in the middle of the capital stack at a liquidity event, meaning if the property sells, we still have a buffer of protection in first loss position. So, all the deals we've done for really I think two years have been that type of deal. To answer your question. — It's such a smart way to structure it because I would imagine there's a lot of operators that just can't get deals done in this environment — without, you know, your help, but it also, you know, comes at a at a cost, too.

9:02Like they there needs to be some incentive for you to to step into that that position. — reminds me of another Warren Buffett quoted something like you don't make money when you or you don't make money by working, you make money by thinking or something like that, — right? — You know, and so sounds like this has evolved and you've really thought deeply through how this could make sense over the years. — Yeah. — And I'm I'm curious too I hear a lot of people say that you can't get commercial deals done in this environment because interest rates are so high.

9:33So what is it about these deals that make them so good? Are people just able to buy them so much cheaper now because the sellers are in a, you know, they're either it's give it back to the bank or sell it for a discount or where are these these great deals coming from? — Yeah. For the fourth time on this podcast, let's quote Mr. Buffett. Buffett and Munger, Charlie Munger, his partner, said that in 60 or so years of working together before Charlie passed, that they never had a single conversation about the economy when they decide to make an investment or a divestment.

10:12And so — interesting, — pretty hard to believe, but they said, "Look, we're looking for durable products run by great management teams with heavy intrinsic value." And furthermore, Buffett said, you know, price is what you pay, value is what you get. And so the intrinsic value means basically they were buying it way below its potential value. And so that's what we're looking for as well. We're looking for great recession resistant assets and that would be in our mind mobile home parks, self- storage, multifamily, light industrial deals that were generally recession resistant.

10:56Notice I didn't say recession proof. And then we were looking for great management teams. These were companies who were able to identify and extract intrinsic value. I'll give you an example of that in a minute. And then we're looking for again deals with intrinsic value built in. So here's an example. I wrote a book on self- storage called storing up profits. And in there I talk about a lot of the intrinsic value opportunities with self storage. You could buy a self- storage facility and and very typ you know like 50% of these facilities are owned by mom and pop owners.

11:36So, a real typical comment from a mom and pop owner would be, "Yeah, we have six acres out back we're not using." You know, that's part of the deal. And so, I mean, you can gravel or pave that and turn it into industrial storage or into boat and RV parking. Boat and RV storage. You can put a cell tower on the back of the property. In some cases, you can put a billboard on the front of the property. In some cases, you can get add a propane filling station.

12:08I've seen some at ATM machines. You can sell locks, boxes, tape, and scissors. You can often increase rates. They're usually on a monthly, you know, they're they're, you know, monthly rates. And a lot of these mom and pop owners will brag that they have 100% occupancy and they haven't raised their rates in three years. Well, you know, maybe that's not the very best thing for the true owners of the business, which is of course the investors. And so lots of value ad opportunities, you know, on that six acres.

12:46You could build more units if, you know, if the if it made sense to do that. And so so many value ad opportunities in a lot of these. And this is kind of giving you an example right now of why, you know, it's harder to do this in multifamily right now. I know a lot of your listeners are single and multifamily investors. I wrote the book called The Perfect Investment about multifamily investing. But honestly, there are far less value ad or intrinsic value ad opportunities in multifamily than there are in some of these mom and pop you know asset types like self storage and mobile home parks.

13:30— That's really interesting. And again another example of just using your mind to make money and being creative there and not just, you know, buying and selling the same asset, but you're just creating something totally different. Right. — Which is which is really awesome. — and I I'm curious for you personally, like when you started in 1999, what was your goal for getting into real estate? And then how did that evolve over the years and into what it is now?

14:03— Well, in 1999 and 2000 when I started, honestly, it was just to it was number one, it was to to not be bored. It It just seemed like a fun thing to do to take a large check and go to the courthouse steps and buy a house to flip. It just seemed like a lot of fun. And actually after about a year in it, I remember telling my business partner, "This is so much fun. I I shouldn't even get paid for it. It's just it's been such a blast." So that was part of it just after a couple years of boredom, which I mentioned.

14:37But also, I mean, when I really understood it, I realized, you know, Warren Buffett said, "If you don't learn to make money while you sleep, you'll have to work until you die." And I realized, you know, what is true wealth? Well, true wealth is having assets that throw off somewhat predictable cash flow. And real estate fit that bill pretty well. And honestly, if except for debt, it's pretty likely that real estate is a safe investment.

15:11Now, debt can make it extremely unsafe, as we all know, depending on the level and the type of debt you get, but real estate really fits the bill, you know, and you've had, I think, Robert Kiosaki on the show, and he talks about, you know, that cash flow quadrant where your money makes money and real estate does that really well. — Yeah. Yeah. Absolutely. So going forward for you then, what's your what's your goal at this point? Well, our goal is to give I mean our best to give our investors the best experience on the planet, the best investment experience.

15:51And that was kind of pie in the sky when we originally stated that. — But we really mean it. We really are trying to give our investors the best investment experience. And I mean today we found out that with the our new funds we launched, we had told a few people who committed to the funds before they opened something wrong. We told them they were going to get an extra 2% preferred return above what you know at least one or two% above what I think that the final documents came out and we're like you know we got to honor that.

16:25I mean we've got to make do a side letter. We've got to honor that. We've got to keep our commitments because it's the right thing to do. My dad always taught me to keep your word even when it hurt. And I want to do that and continue to do that. So we want to give our investors a great experience. We want that, you know, real estate, like I said, should be an asset type that's relatively safe and relatively non-speculative. We want to make sure that at least for our investors, that's the experience they get.

17:00Furthermore, I'm trying to do something really good in the world. And one thing that's really good is give investors the opportunity to build wealth, but another thing is to do things like funding the fighting of human trafficking. I was horrified to find out that 200 years after slavery was outlawed in the UK and about 160 years after it was in the US. We have more unfortunately enslaved people in the world than ever before.

17:34And if you took the record profits, not the average, but the record profits of Walmart, Nike, and Exon Mobile, record profits. Added those together and then tripled that number, that's the approximate profitability of human trafficking right now every year. And so Wellings Capital decided we couldn't really solve that, but we wanted to solve it for one little girl or maybe even hundreds of little girls.

18:05And so we partnered with a group called AIM, who rescues little children out of trafficking. And the website's aimfree.org. And for $1,000 per child, they can rescue people out of this living hell. And they can put, you know, for every five or 10 girls they rescue, they typically put a couple bad guys behind bars as well. And so it's something we're really excited about and we are really passionate about doing as well as being a good place to invest.