How Taking Imperfect Action Can Transform Your Real Estate Journey with Andy McMullen

[0:00] Welcome to the REI Agent, a holistic approach to life through real estate. I’m Matthias, an agent and investor. And I’m Erica, a licensed therapist. Join us as we interview guests that also strive to live bold and fulfilled lives through business and real estate investing. Tune in every week for interviews with real estate agents and investors. Ready to level up? Let’s do it.

[0:24] Welcome back to the REI Agent. It’s your local friendly host, Matthias Clymer. I wanted to start off this episode just by talking a little bit about the progress of starting something new or just in general, just doing something. I think that the goal should always be to improve, to always continually get better. But I think that often whenever you want to take on something new, take on a new activity, there’s all this fear surrounding it. And also a desire to kind of make things perfect to start. And I think that often you just kind of get in this analysis paralysis kind of situation. So if you’re looking to get into a rental, you could be trying to find the perfect home run and spend years doing research, listening to podcasts, reading books, and never actually taking any action.

[1:17] But I think I want to encourage people to not strive for perfection for the beginning, but to continuously improve on what you’ve done. So I’m not saying go out and buy a rental deal that doesn’t make sense, that doesn’t actually cash flow. I’m not saying that buy a flip that you will not make a profit on that you’ll lose money on. But what I am saying is that people often have the tendency to not take any action at all and just kind of wait for the conditions to be perfect. And in reality, that’s really just fear speaking. You know, one of the things with this podcast that I think is funny is that, you know, we kind of keep doing new things, getting kind of getting further along in trying to get a better product for you all.

[2:02] So, you know, we started off, our first episode was in our sunroom, I think. And then we were in our dining room for a long time. I had an episode with a buddy in my kitchen. And we, you know, I had this professional camera the whole time. And for some reason, I just didn’t use it. I used various things. At one point, I used my cell phone, iPhone. And that one was a little bit weird. It had some weird zoom in effects and stuff at times. And, you know, they’re just kind of perfecting the process. There’s a couple episodes here recently that, for some reason, the wrong mic was on. And it’s so I’m sorry for if you’ve been with us through the beginning. If you had to go through some of that stuff, I apologize that it wasn’t perfect for you.

[2:52] I hope that you’re still getting a lot of value from the guests that we bring on and the things, the insights that we bring to the show. But tomorrow, we have some fancy lights coming in. And so depending on when this is aired and when the episode is on that we have the lights on that gets aired, comes out, we will, you know, be increasing the production value of this podcast even more. And that’s partly just fun for me, but also partly just this desire to kind of continually grow and continually do better. And with that said, I would love to hear any thoughts that you would have if you have any kind of ideas for what you’d want to hear us discuss, how you’d want us to approach, you know, guests differently.

[3:41] For example, if you have questions that you think that would be great to hear, you know, please look me up on Instagram or whatever. REI agent podcast. If you look that up, you can DM me and pretty much any social media platform and give us your ideas. It’d be great. Or if you have an idea of a guest who would be an awesome fit for our show. Yeah, definitely let us know. And then while you’re at it, if you do enjoy this content, if you wouldn’t mind going and subscribing at whatever platform you’re at, you’re listening to it on and leaving us a review, that is super helpful for our growth. So, yeah, definitely remember to engage with us. It really makes a huge difference and helps us get to more people and helps us feel like what we’re doing is worthwhile.

[4:27] No, no. In all seriousness, we’re honestly just doing it because we, love doing this show. It is so much fun to talk to amazing people. I’m blown away with how much growth we’ve had already. Love to see the view counts increase and, you know, the guests that we’re getting on. Like, I couldn’t have imagined when we first started that we’d be getting some of the caliber of guests that we have. And it’s just super exciting to, you know, go through this process with you all. So, thank you for being here. I want to talk about our guest a little bit, Andy McMullen. Andy is coming out of San Diego. And he is a really, really interesting guest because he is a syndicator. You may have heard us talk to some syndicators in the past.

[5:19] He used to be a commercial agent. He used to broker deals more. But anyway, Andy is doing essentially developments. But they’re single family, you know, 300 houses or so developments. And so, instead of building an apartment with 300 units, he’s building a subdivision and renting those out. So, super interesting strategy. And he gets into that more. And we talk about what syndications are and the benefits of them. And then some of the risks or some of the things that you should look into if you are considering investing in one. So, without further ado, we have an awesome guest for you here today. And enjoy Andy McMullen.

[6:07] Welcome back to the REI Agent. We are here with Andy McMullen. Andy, you’re coming out of San Diego. But you are developing across the country, not just in San Diego or not in San Diego. Andy, tell us a little bit about what you’re currently doing and your investment strategy. Yeah. So, what we’ve been focusing our energy now for the last six years is buying undeveloped land, raw land, getting it entitled. And then building single-family, detached, in some cases townhomes, but mostly detached homes in communities of 100 to 300 homes for the purpose of renting them to residents. Wow. That’s a strategy that I don’t hear about quite as often as doing an apartment complex. I could see the advantages of being able to start selling individual units, et cetera.

[7:06] Tell me about why you go about that strategy there. And is it a different type of location that you’re investing in as opposed to like a big city? Is that part of the strategy there? Yeah. So, part of the strategy is in secondary and tertiary markets, typically the land is a little less expensive and labor is a little less expensive. And we can build faster if there’s less regulation and less kind of headwinds. But we do, Matthias, build single family in those communities that really want us. And if we need to, we can individually plat them so that we, if we needed to, as an exit strategy, sell them. But our main purpose is building them and owning them for five to 10 years. The exit strategy would be the same as an apartment building in that the end user and institution is buying the income stream.

[8:08] So, if you just think of an apartment complex being built and just built horizontally. Yeah. Yeah. Okay. So, you don’t necessarily have those houses individually like separated, subdivided when you do this. Is that what you’re saying? In some cases, we do. In some cases, each house would be individually platted. In some cases, you might have what they call a PUD or planned urban development where you’ve got one kind of designation of 150 to 300 homes on, you know, entitled for multifamily, building them as detached. Right? Detached multifamily. And then, you know, renting them as one single entity, some division. But in many cases, it does give us, if we do individually plat them, we have an exit strategy where if we build 100, we could sell off 20 or 40 at a time if we needed to.

[9:08] That’s fascinating. Yeah. That’s really cool. Yeah. I mean, I could see. So, we’re in a tertiary market here. I’m not sure how it would compare to the sizes of areas you’re working in. We’re in a college town. Yep. But, yeah, I could see that being a very appealing thing for people. So, there would be a lot more appeal for people to live in that kind of a community, I think, than an apartment. They’re just not as common around here. We have, like, one residential condos, set of condos that go up for sale. Oh, interesting. And it’s just a whole market. So, the apartment model is just not as common. We do have some kind of rent. Yeah, I think that, like, in the southeast, if you’ve got areas that do have some population growth, they’ve got, you know, kind of families that are in the formation years.

[9:57] You know, good schools, that kind of thing. It’s a little bit easier to draw folks in to our kind of communities with all the amenities that an apartment would have, but they’ve got their own space and backyard. And part of that reason is, if it’s newer, mortgages are $1,000 more in general per year. And you can have the new stuff without the stigma of being the one renter on a block. You’ve now got kind of the tech that’s needed and the amenities. It’s a draw for a lot of the markets that we’re working in. So, that’s Lafayette, Louisiana, Baldwin County, Alabama, Texas, Carolinas. A lot of the areas that kind of want us there, that the land is not so expensive. Okay. Now, I have a lot of questions about the nuts and bolts of it, but I’m also curious about how you got this.

[10:53] To this point, how did you get to decide that you’re going to develop communities and renting them out? Like 20 years ago, 30 years ago, did you have any idea that you’d be? Yeah. No, that’s a great question. You know, I actually, I was on the brokerage side. I kind of came into the business 25 years ago out of school in Los Angeles. And I was doing a lot of kind of the mostly commercial, you know, office and industrial. And then in Venice Beach, where was one of my markets, a lot of those kinds of business coalesce. You might have retail on top of live work and right next to industrial. And so we kind of became the brokerage for that particular market. And as we evolved, we started to see a lot more of these live work development projects.

[11:42] And so we started developing them. And they would kind of, the idea was that you’d have, you know, like maybe a Google employee or kind of a smaller tech offshoot of Google that would want to have space to live and work in a lot of these areas. And so that’s kind of how we started doing the development. Okay. And then, you know, 2008 hit, the market changed quite a bit. As you remember, it didn’t really come back until 2012-ish. So we were buying kind of smaller apartment buildings. And then over the last kind of five years, six years, as many of those same companies that kind of put us in this GFC, you know, were the ones that were buying these scattered homes. You know, in many counties and then, you know, holding on to them, increasing rents, you know, making quite a bit of money for their investors.

[12:38] So about six, seven years ago, we met up with a group in the Southeast that had been doing this but was developing them. So it was kind of putting them together in one area. And that made a lot of sense to us because there’s efficiencies, there’s economies of scale, there’s a lot more kind of sticky residents where they want to stay, they want to be part of the community. So we still like multifamily. We still like the apartment game. But this, I think, is in the early innings and has a lot more upside in the kind of post-COVID Southeast where people are living and working, you know, in different places. Yeah. Yeah. Yeah. So I guess, is there numbers or metrics on the length of the average renter to stay in one of these?

[13:28] And is it a lot different than in an apartment community? Yeah. So on our portfolio, it tracks pretty closely with kind of across the country. But typically, you’d have a single family resident that’s renting, staying about 24 to 36 months. Okay. As opposed to a single, as a multifamily renter that’s really 12 to 18 months. So that’s a big deal, Matias, when you think about kind of the process of moving a resident in and out, right? You’ve got a lot of your budget in a multifamily project is sucked out by the kind of turns, right? And so if you’re turning every 12 to 18 months, you’ve got a lot of repairs to make. You have less of that. One, because it’s a new product. And two, because they’re staying longer.

[14:25] In addition to that, you’ve kind of got this referral piece of people that actually want to be in the community where they know their neighbors as opposed to on top of them or below them. So there’s a lot of kind of marketing benefits to being in a single family project like that. Okay. So there could be like a better sense of community in this kind of area than in an apartment. Are there, you know, do you have like parks or not parks or like, you know, playgrounds or anything like community spaces within these kind of elements typically? Yeah. So if you think about kind of some of the apartments that you’ve seen that have been amenitized, they might have a clubhouse, a pool, a walking trail, you know, a playground.

[15:08] All of those things would be in our communities, except you’d have maybe a bigger backyard and we would be cutting the grass. So you’d have all the kind of amenities that you’d have in a nicer kind of maybe a class apartment community, but you wouldn’t have somebody on top of you be detached. In some of our communities, it’s very, it’s very simple. Without the clubhouse, maybe without a pool, we might have these just large lush spaces for walking trails. We might have, we do have playgrounds almost in everything that we do, you know, storage, some of the additional amenities. But yeah, so every project is a little bit different, but in general, what our residents love is the fact that they’ve got this kind of independence without having, you know, we get a lot of empty nesters that would love to have their barbecue, but they don’t want to have to cut the grass every week.

[16:02] Yeah. No, that makes a ton of sense. It’s awesome. And storage, that’s a genius idea to have that built in. Might as well plan for it. And I imagine you could, obviously you could accept people from outside the community to actually use the storage units too, if it’s needed. Sure, sure. And, and, and, and, you know, with, with a lot of these projects, you can usually have packages in place for, you know, residents that want their cable packages or, you know, whatever their internet, you know, there’s a lot of, there are different kinds of ancillary ways to, to kind of create value for residents that are there that do bring investor income. You know, so like the, I’m sure this isn’t your approach, but you could, you could make them too small, have storage units and then have the laundry and have a laundry facility.

[16:52] Yeah. I mean, that’s, I mean, that’s essentially what an apartment complex is. That’s true. I think, yeah. And, and almost all of ours have, have the, you know, attached, that’s kind of another draw of being in a community like ours is that you do have your own washer and dryer. Yeah. But, but in some cases people like to have, you know, bikes that are stored differently than in the garage or, you know, they might have, you know, other kinds of seasonal things that they want to have in, in storage. So we try to provide those kinds of things for, for our residents. Totally. And I’m just joking, making, making a joke about it, but the, cause I mean, I think every community, I mean, it’s pretty rare that you can get into a new community and feel like there is just ample, ample, ample storage.

[17:37] So I see that being a huge benefit. And typically, I mean, there could be people, like you said, downsizing that are coming from a much bigger house, want to make, have a simple, simpler life, but maybe have a little bit of a hard time actually getting rid of all the stuff. Well, you know, what was something I probably should have known Matias, but I didn’t, I didn’t really think about was how many of our residents would become this kind of empty nester for exactly the reason that you stated is that they love the idea of having their barbecue and backyard and space and room for the things that they’ve acquired over the years. But they don’t want to have to do the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the,

[18:42] accumulated a lot of stuff. When they get out of the house in another decade or so, we’re going to have to figure out where to put all that stuff. Yeah, exactly. It’s hard. It’s hard not to. I mean, we, we, we bought our first house in 2013 and it was 1,200 square feet. And then we moved to our next house, which was a fixer upper that was 4,600 square feet. We’re like, how the heck are we going to fill this thing? Well, we have. But it doesn’t take long, right? That was kind of what my wife said. Oh, we’ll never be able to fill this house. Well, it didn’t take long at all to fill the house. So don’t worry about that. So, so yeah. So then when we, when we get on the other side of this, it’s going to be back to 1,200 square feet.

[19:27] And how the heck do we reduce the stuff that we have to get into there? So yeah, a little extra storage, I’m sure it’d be huge. And you’re probably saving a lot of money by, by downsizing like that. So it’s, I’m sure that that makes a lot of sense. That’s also, I mean, there’s a huge need for around here. And I’m sure this is nationwide. I mean, just people in that generation getting to the point of needing, you know, single level living houses. That kind of thing is a huge need around here. We don’t have near enough options and often they come at a premium. So are most of your houses geared towards single level living as well then? Yes. And it’s a, it’s a really good point that you make because I think a lot of the development was halted, you know, a lot of out of fear.

[20:11] A lot of the overbuilding in, in, in that kind of late, you know, nineties, early two thousands. And then it kind of even throughout the great financial crisis, it didn’t really start to ramp up probably till 2015. But what we were able to kind of figure out is that if you kind of create these open spaces, like you said, like just kind of single living spaces, but you have green around it, that the communities really love that idea. That you could have actual people walking trails, et cetera. And that even in that case, as the developing team for us, we could build them much simpler. We could have almost all of the, in one community, we have them almost all three bedrooms, two bath, same interior with different elevations.

[20:59] So the porches and the outside would look different. The same interiors would be the same, which means that, you know, the efficiencies for us building in the speed with which we can build them. Sure. And the kind of, you know, drag is a lot less when you have, you know, new subs coming on, if it’s the same plan. So there’s ways to more efficiently build these things that we’ve kind of figured out in the last five, 10 years. Yeah, that’s fascinating. We had a really interesting guy on a while back that talked about kind of like making an assembly line for apartment development and how he brought everything in-house and just saved like, you know, 70% or sorry, 30% of the cost because he could get it done faster.

[21:45] So I’m sure that as you go, like perfecting those things just make a huge impact to your overall numbers. Yeah. And development is so much of that, the speed with which you can complete these things, right? That’s part of the reason I think people, when they think about development, they think about the risk and the entitlement. And that’s usually they’ve heard a story about, you know, NIMBYs or they’ve heard a story about, you know, a political fracas or it might be just, you know, this is in the backyard of that politician. It could be even that. But if we can strip away some of that risk, then we can get to the unit build part. And now as technology’s evolved, in some cases we’re exploring, you know, the modular homes or, you know, other materials that’s just so much quicker to build.

[22:39] So those are all kinds of things that make the development process a lot different than people that were looking at it, you know, even five, 10 years ago. Well, and a lot of people don’t even understand that you could invest a lot of capital just to see if a project will be approved or not. And so there, I mean, there definitely is that risk as well. And we’ve been, you know, in communication with our local officials trying to explore, you know, creating more affordable housing and explaining that, you know, really the supply is the problem. Like we don’t have enough there, like you mentioned, there’s been this fear that building stopped for many years. And so now we have so many years of, even now that we see a lot more development happening, we still have many years to catch up to what the actual demand is.

[23:29] And that’s really what will create affordable housing and how all the hoops that developers have to jump through. Some of them are valid. Some of them just seem like they’re a money grab. Are part of the issue with, you know, preventing development, which is ultimately what will solve the affordability issues long term. I mean, have you, do you have any comments about that as well, like from what you’ve experienced? Yeah, I think what we’ve learned about our investment pool is that if we can option land. So let’s just say that we’re going to go into 30 acres we find in Lafayette, Louisiana, that’s one of our projects there. So we can build 240 units on 30 acres of land. If we can option that land, which we did first, maybe we pay 50,000 for that land up front.

[24:23] And then we do all the approvals, right? So then we go and we meet with the politicians, the councilmen, the, you know, neighborhood council, so that all of the kind of risk in that political regard is stripped away. So we use all of our money to do that when that’s ready to go. We’ll buy the land with our own money, then do the entitlements, right, with our own money. And then when we’re bringing it out to the market, we’re bringing that out in the horizontal phase, which is the streets, roads, utilities. So a lot of that kind of front end uncertainty is pulled away. There’s still obviously risk in dealing with, you know, consolidated governments and engineers and, you know, just whoever that is, you know, utility service as you’re building streets, roads and utilities.

[25:14] But we’ll give our kind of investors a higher tier on that front end. By the time we get to the vertical build, that, you know, return is maybe a little bit lower, but the risk is lower. So I think if you can kind of strip out a lot of that front end, then investors start to, this becomes a little bit more appealing. The other thing that we learned, Matias, was that I think a lot of investors now, because they want their cash flow, if it’s an experienced group like us and we’ve got a substantial balance sheet, then they can kind of invest in the business of what we’re doing as opposed to the individual project. And now they’re lending, maybe they’re only making 12 or 14% instead of the 20, 25, but they’re getting paid every quarter or every month.

[26:03] And that might be an alternative solution for a lot of people that are trying to syndicate these days is become kind of, you know, become kind of a borrower as opposed to, you know, an equity provider. Interesting. Andy said that, does that mean that you are operating mostly off the fund model instead of syndications for each project? No, I think in general, each, we’ve got the same team that’s built multiple projects. So in general, because we’ve got multiple projects, we might have investors that say, hey, look, I like legacy acquisitions. Let me invest with you guys. You guys pay me a 12 to 14%, you know, quarterly return, utilize that money for your projects. And then, you know, it’s collateralized by something in our portfolio that we own, maybe not even a specific project.

[26:56] So that might be one avenue. Another would be setting up a private placement memorandum, which is, as you mentioned, syndicating that individual asset, taking it out to the market and saying, here’s a, you know, here’s our offering for a 22% internal rate of return. You know, would you like to invest in this project? The other thing that I haven’t heard many people doing, but I think does make sense in many cases, is this kind of pre-PPM phase, this kind of pre-syndication phase. And what we call this is like a safe agreement, basically. It’s an agreement where people would invest at a particular stage of the property and then would be paid a return prior to, as soon as that first capital event happens.

[27:52] So to give you an example, someone might put in maybe $100,000 in our horizontal phase. And we’re guaranteeing in that kind of pre-PPM a 15% or 20% return, right? And that money would be paid to that investor as soon as the next capital event, whether we get a loan for the vertical or we’ve got other investors in the verticals. So they’re really only investing in that one phase. And a lot of people like that because it’s basically the time horizon is a lot shorter than investing from day one all the way to, you know, the six years down the road. Okay. Yeah. And I guess we could kind of maybe break down a little bit some of this jargon for people. The IRR. Can you explain a little bit how that works?

[28:52] Yeah. If somebody wants to invest $100,000 with you and they’re projecting a 22% IRR, what does that mean? Yeah. So for folks, the kind of simplest way to describe an internal rate of return is as a project progresses, there’s cash flows paid out to investors as in dividends or they’re put back in the property and held internally. So with each cash out, with each cash in, the IRR, the internal rate of return is affected. So if you kind of think of it as like a discount rate, let’s just say you put in, you know, $100,000, your internal rate of return might be, you know, 20%, right? Because some cash came in, some came out, but your annual return, which is what a lot of people consider when they’re investing.

[29:52] I’m going to put in $100,000. How much am I going to make every year? Right? That’s kind of the average annual return. That’s a little bit easier for people to understand. Like, what’s my equity multiple? If I put in $100,000, how quickly is that going to get me $100,000 back? Well, if it’s a two times multiple, that’s 20% per year, you’re getting your $100,000 back in five years, right? Right. And IRR is a little bit more, there’s a lot more kind of formulas based on the rents that are coming in, the inspections that are going out, when you as the investor are getting your money. So the idea of the IRR is like if we were to internally invest that money, how could we get that money to a discount rate of zero?

[30:44] So I think most investors prefer to say, what’s my equity multiple, my average annual return per year? The IRR is great, but I don’t necessarily need to be that sophisticated about how quickly my cash flow is coming in and out. Okay. Yeah, that makes sense. Thanks. And yeah, so when you are doing, when you’re opening these up for people, do you typically have a minimum investment for people to jump in on or how do you? Yeah, so typically we like to be marketing to accredited investors and I’m sure your listeners know, but just to kind of restate it’s, you know, 200 to 300,000 individual salary or for the last two years, if you’re making that 200,000, if you’re an individual 300,000, if you’re married or have a net worth of a million dollars without utilizing your home.

[31:52] Your primary residence. So a million dollars in net worth without your home, which seems silly to me, but the idea is that they feel like you’re a more sophisticated investor if you’re accredited, if you have those kinds of earning, that kind of earning power. So that’s a 506C deal, which means that you’re marketing to accredited investors. And then a 506B deal is if you’re marketing to regular sophisticated investors that might not fit those criteria. We happen to do both. Typically our minimums are in that 50 to $100,000 range. A 506B deal, you know, folks need to, you have to have a prior relationship with them to invest. So that kind of prevents folks from just hearing about something on a podcast and saying, Hey, I want to invest in a 506B deal, but I don’t have the requirements of the two to $300,000 in the million dollar net worth.

[32:55] So we do, we do both of those, those deals. Yeah. The idea behind the B would be like, you know, Hey, I, I want to do this project. I need money. I’m going to ask my friends and family. Right. That’s right. Um, and, and we, we’ve made it a little bit more complicated by, you know, the internet. That’s right. And, and yeah, exactly. And, and, and it’s a real thing too. I, you, you kind of understand when you hear some of the horror stories of folks that maybe had put their last 50,000. We don’t want to take anybody’s money. That’s, that’s really kind of their last 50 or a hundred thousand dollars. So we, you know, we really try to focus on accredited investors, but there are friends and family that potentially have a substantial net worth.

[33:37] Or they make substantial amount of money over the last two or three years, but they put a lot of it into their home. And so if they’ve done that, then they might not fit the requirements. So there, there is a 506B sophisticated investor that shouldn’t be precluded from investing in real estate. Yeah. Yeah. Yeah. I mean, and because, uh, you know, we were talking a little bit off air on this, but there’s a lot of advantages in real estate investing. Uh, if, if you are a real estate professional, you can take advantage of things like depreciated or accelerated depreciation on a house. So like normally, I think most people that are agents, et cetera, would understand that, that if you, if you buy our investment property, you can subtract the land value, just the structure and divide that by 27 and then take that off your taxes every year.

[34:27] Um, but an accelerated, accelerated depreciation can really speed up that. And that’s where you basically have like an accounting, uh, I don’t, I’m blanking on the word right now, but like you just basically separate all the different items and have, they have different time schedules. So like trader has this long or the, uh, the, you know, the, uh, AC unit has this many years of life in it. And then you can, you can basically get that depreciation faster. And then a syndication, you can take advantage of that. Correct. Yeah. And, and there’s, there’s some, there’s some, uh, real estate agent that’s been kind of listening to this. They’re bored out of their mind. I just want you to push, I just want you to put the dishes down just, just for a second and just listen to this because what, what Matias is describing could be a game changer for you.

[35:18] In fact, it might even get you married because if they, if, if you find the, the, the best looking girl in the bar and you say, Hey, I’m a real estate professional. I can write off all of our income in losses. You might be the next catch. In fact, I remind my wife of that all the time. What, what, what Matias is describing is this, this cost segregation study that basically can pull various timelines of, of, of your, that property and accelerate them. So that all of that depreciation is taken in year one. Um, so imagine that you bought, you put a hundred thousand dollars into an investment on paper. That investment is giving you, uh, or I should say in real dollars, that investment is giving you 20% return, right?

[36:16] In paper value. When you get your K one at the end of the year, it removes all of the expenses that you had to put into that property, which for you was nothing, right? You put in the a hundred thousand dollars, but you basically lost value on paper for all the expenses that you paid into the property and all of the capital improvements in development. That’s everything from the streets, roads, utilities to the unit build. And in many cases, we showed a loss of a hundred thousand dollars for every, for a hundred thousand dollar investment. Now, maybe that’s 40,000, maybe that’s 60,000, but for you as a real estate professional, you can write that off against your other income. Um, so if you’re, if you’re, if you’re, uh, married and filing jointly with a doctor wife or somebody who has got a W2, that means all of that income that you guys made that would be paying taxes is wiped out by you just putting your money in a real estate deal.

[37:23] So, uh, I just want people to talk to their tax professional and if they tell you, they don’t know anything about cost segregation or depreciation or real estate, you should find somebody else because this is, could be, especially for agents out there. Yeah. A real game changer for you. Huge, huge game changer. And I’ll, I’ll even go further and just talk about an experience I’ve had in, in a syndication and, and, and preface it with, you know, it’s not going to be a guarantee that this will always happen. Um, but I invested $50,000 last year into a syndication and I, um, I have nothing to do with it, right? I’m not managing this property. I’m not having tenants call me. I’m not none of that.

[38:06] Right. And I was able to write off $66,000 off my taxes because of it. And that’s, that’s real money. People think about, oh, that’s just a write-off. But, but for you, for Matias, who’s a real estate professional, that’s not like, uh, for just his gains. Like if, if, if you did, if he was, if, if, if, uh, Matias didn’t have a bow or he was just single and he, and he didn’t have a real estate professional designation, he could not use that depreciation in the same way that a real estate professional could. He could write off business losses or other real estate that he invested in that lost. But you as a real estate professional can write off your active income. That’s so huge. When, so 66,000 is real dollars for people like Matias.

[38:58] Yeah. So let’s say that my commissions, uh, in word $200,000, let’s say last year. So then I could, you know, it looks like I’ve made 144 or wait, 134, uh, as in instead. So, I mean, it’s, it’s an amazing thing. Uh, and, and meanwhile, you know, the, again, the syndication is getting me, uh, I want to say like 13% return every quarter. I get that it’s annualized 13% on average. And, and then, you know, in five years or so, I’ll get my money back from a capital event. So like, it’s just, uh, uh, it’s a, it’s an amazing opportunity. Um, that being said, and, and, and so this is, yeah, this is, we talked about this as well, but this is one of the things that I’ve been kind of wanting to preach to agents.

[39:41] Cause I don’t think, uh, the designation of being a real estate professional is really fully understood and why that’s such a big advantage. So thank you so much for explaining why, uh, that is such a big advantage and you don’t have to do syndications to take advantage of it. You can definitely buy your own place, but that comes along with all the headaches. And also depending where you live, it can be really challenging to get that kind of rate of return on, uh, an investment property. I, in San Diego, can you buy a rental and get 12% return on your money? No, no. Maybe at some, at some point in the future, you’ll, you’ll get better. Oh yeah. Over depreciation. Um, but, but, but no, and, and, and, you know, I don’t want to give short shrift to the, the person that wants to kind of be the operator and maybe a duplex or fourplex.

[40:33] But I, I, I’m just telling you from my experience in doing those smaller deals like that, there is so much more work that you can get that same kind of net benefit, run your real estate business. Focus on your clients. Focus on growing your business while you’re investing some of those proceeds and commissions in alternative investments that are paying for any taxes in the future that you’d be paying. And the other, the other point of this that a lot of people don’t understand is, okay, well, that’s great, but I didn’t make as much money this year. Okay. So whatever you earned on that K one, whatever that depreciation loss was in that K one, you couldn’t use it. You don’t lose it. You roll it forward to the next year and the next year and the next year.

[41:26] And so if you can’t use it, it’s not one of those things where you lose it. It’s awesome. Yeah. It’s really amazing. And yeah, it, it, I agree with you completely. I have a lot of, I can attribute a lot of my success to the portfolio I’ve built that I’m managing myself. Um, but also I didn’t fully understand going into it, these options. And there are some things that you can do with when you are a little more strapped for cash, like, uh, you know, doing a burr strategy where you’re basically flipping a house and keeping it refinancing and keeping as a rental, uh, that you can then have this equity, uh, sitting there that you, you know, basically had a magic trick and created by flipping the house.

[42:10] And now you have a rental that’s maybe performing better as well because of the discount you got for having to buy a house that needed that much work. Um, so there’s definitely advantages there too, but I think especially for the agent that is just really busy and doesn’t have time to think about, uh, learning that art, that, that process, they’d probably have more money than time. And they’re really good at what they’re doing and they’re really good at their sales. This is a perfect opportunity and so much better than investing in the stock market. You know, this, this is such a, I mean, if it goes well and we will have to come back to like the risks and what people should look out for. Um, but you know, if, if you’re investing in the stock market, like it’s, there’s nothing wrong with it.

[42:50] And you should probably, you know, balance your portfolio, blah, blah, blah. But, uh, as a real estate professional, this is just such a win in all, all the areas you’re getting, you’re getting money you can use now. Um, I think every real estate agent has had a slow period of their, in their career. You know, I still get this, uh, you know, quarterly payment from the syndication that will continue. And the deal that I have when the capital event happens, they’re going to refinance and it’s going to, so I’ll get my money back, my investment back by 50,000 back. But I’ll still have like a 1% ownership in this, in this deal or something. And so I will continue to get a check. It’ll be smaller at this point, but I have all my money back and I’ve made, you know, I made my money back in like probably a few different ways by then too.

[43:34] Like probably not quite with the distributions, but with the tax benefits I already have. Yeah. I mean, we, you know, we’re talking about tax as we should, cause we’re talking to real estate professionals. But I, but I also think that, you know, when you are putting your money in a syndication, there are so many other ways too, that you’re benefiting. Of course, there’s the kind of, you know, you know, inch there, of course there’s the, the depreciation. And of course there’s the appreciation, but there’s also the loan pay down, right? As you’re, most of these loans are getting paid down, you’ve got this Delta of room so that your risk just continues to decrease every year. Right. You’ve got just in, in general, you’re paying back where the operator that you’re investing in is paying back the mortgage at today’s rates.

[44:24] Right. So. Right. With, without considering inflation, you know, through, throughout the year. So you’re getting a couple of points in each of these categories, which is why it’s easier for you to kind of understand intuitively why it makes maybe a little more sense to have some of your capital invested in real estate or alternative investments, as opposed to knowing the 10, 20, 20%, depending on short-term, long-term gains on the stock market or options that you’re going to have to pay as opposed to real estate that you can kind of keep that continuing to work for you, as opposed to every year having to pay out a big chunk of change. Yeah. Yeah, no, a hundred percent. Yeah. Yeah. Yeah. Any realtor, any real estate professional listening should understand the power of leverage and power of, of, of real estate and how amazing it is in, you know, today’s world.

[45:19] And I think, again, like, you know, I love to be able to get this passive income coming in because that I don’t have to wait for until I retire to get, because again, my, my income is not consistent. It goes up and down. Some years I’ve, I’ve, I’ve doubled my, you know, my sales. Like it’s, it’s great. And I, you know, luckily I’m at a point where I’ve, I’ve kept a consistent like base that is plenty to live on. But yeah, some years I double it and it’s just, where’d that come from? Yeah. And what a great year to invest in a syndication. I do want to move into a little bit vetting a syndicator, a deal. What would be some tips you would have to somebody looking into it? Because we’ve described this, you know, beautiful scene here of all the benefits of syndications.

[46:10] And people, especially here recently have had some bad experience with syndications. There have been, there’s something called bridge loans that people often use in apartment syndications where they, they are, they’re basically needing a little extra money for a short period of time to get this property, you know, flipped or whatever they’re doing with the department. And, and here recently we saw interest rates skyrocket. And so a lot of people’s projections did not account for interest rates on these bridge loans to go up. And that has left the investors not receiving dividends and potentially even having to put more money into the deal to make it work. So, so what are some of the possible pitfalls and what would be your advice to people that are listening to how to help vet who they’re investing in?

[47:00] Yeah. So in many cases, and I, and I’ve been through three cycles now, you can kind of see it on my face. The, the idea is that in the long run, the decisions that you’re making and the people that you decide to invest with are much more important than the real estate or the market. Right. That, that maybe, maybe that’s not obvious for, for some people, but, but, but it should be because if you’re going to, uh, uh, uh, you know, uh, a doctor, you know, you’re not asking him about the surgery and all the details of, you know, how he’s going to be doing it. Right. You just want to know that he can do it. And has he done it before. Right. And I think that what happened in this last cycle over this last couple of years is there were very, very good operators, um, even that did not have the wherewithal to kind of withstand some of these transitions in the market.

[48:01] Like if you had to buy a rate cap, which means that you’re, you know, going to cap the rate of your mortgage. So let’s say you were paying a 10% for a, for a bridge loan, you would buy a rate cap at 10 or 11% and then it goes over. Then you, you’re paying consistently that 10 or 11%, but that’s got to expire some time. And in many cases we expired two years ago. And so you’re now paying another million dollars for that policy because rates are up at 13. And a lot of the good operators did not have that cash to withstand those kinds of changes. So in some of it’s market driven, but what I would say is if you’re investing with an operator, part of that vesting is part of that vetting is do they have the balance sheet, the net worth and the wherewithal to kind of withstand some of these market dynamics?

[48:55] Because they could be very good at what they do, but not have the kind of extra cash needed to withstand some of those changes in the market. So that’s one. The other is that’s very easy for you to see the reporting for a previous investor. Say, Hey, look, I just want to see the last four exits. Give me from kind of point a, when you start sending out your updates to when you exited the property, what did it look like each step along the way? And you can kind of get a sense of whether they’re communicating well or not. So those are, those are, those are some of the things. Um, but, but to your point, Matias, there is unfortunately no way to know, like in 2008, the water just stopped for everybody.

[49:44] And it was three years before we were able to kind of really see real estate come back. There’s a risk in this, what we do. But over the long time, if you were able to write off that 66,000, that’s a pretty good deal. Even if you did have maybe, uh, just getting your capital back or maybe losing a little bit. Um, and if the real estate’s slipping, it’s likely the market’s slipping quite a bit too. So I think it does kind of go back to, can you diversify, find operators that do have the track record and the wherewithal to support, you know, those issues as they do come up. Um, and if I can give one more, Matias, uh, investing in operators that have run a business, um, whether it is a real estate business or another business, this is a business.

[50:41] Each entity that you’re investing in is a business and it needs to have the KPIs and the people, and it needs to have somebody that can navigate those dynamic, um, forces at play. Because if, if, if you don’t, um, the, um, the experience with really smart operators I’ve seen in this last four years is that without that, um, and you’re just relying on your intelligence, you don’t have the intelligence of the team or an operation that’s being run like a business. Yeah. Yeah. That’s, that’s a key differentiator maybe for people that are looking to branch out from, you know, just investing in your, you know, an apartment or whatever. Um, a single family, uh, house that they rent out to somebody into like a multifamily or, you know, yeah, horizontal multifamily, like you’re, you’re talking about is that it is, it’s a business.

[51:33] I mean, that’s, that’s what, what you’re doing. You need to have the system. So that’s a really good point. And yeah, and I, everything you said there, it makes a lot of sense as to what you’re looking for. And so part of the, part of the vetting, if you’re, if you’re in a syndication looking to, to, to get into a syndication is the deal, uh, you know, looking over the deal itself. But really more importantly, like you said, is, is trusting the operator and, and vetting them. So, um, yeah, because you don’t, you don’t, there’s like, you can kind of almost think back in any cycle that you had, or even as agents, the people that are listening in, there was some great opportunities to buy, um, that you probably still would have consulted them to buy.

[52:17] But you couldn’t predict that mortgage rates went up to, to six and a half or seven and a half or eight and a half. And no one that was locked in at 4% wanted to sell, right? You, that your business changed, you couldn’t predict necessarily. I’m in California. I couldn’t, I couldn’t have predicted that even California, uh, would have done rent control. I wouldn’t have been able to, like, I asked developers, they said, oh, that would never happen. Uh, you know, recently with the NAR, um, you know, requirements on commissions that, that was probably something that we would have thought, Hey, the, the lobby is so strong. That’s never going to happen. Now that one, I think is very interesting and I’m sure you probably talked about it on your show.

[53:00] Not a ton to be, to be honest, go ahead. Okay. Well, I think this is really interesting because I think this is a good example of how valuable the kind of, um, captain is as opposed to the deal or small pieces of the real estate market. That agent who now basically says, I’m your negotiator. I am your negotiator on your, your, your property. You want to have a high price and you want to have somebody to negotiate. Now, am I the best person to negotiate your home or your project? If I’m basically giving up two or three or 4% right off the bat, just because you want me to, or there’s some other discount broker that says that they’re going to do that. Would, would you in fact want to have somebody working that’s not taking a fee as a syndicator?

[53:56] When I’m investing as a limited partner, Matthias, I want to make sure that that person I’m investing with is taking a fee. Cause if he’s not taking a fee, it means the next time another opportunity comes back and he’s got no fiduciary obligation at all. He’s somewhere else. So these are the things that I think the person and the people that are representing these deals are so much more valuable. And I do think that it, it dovetails to kind of what’s happening in, in the real estate agent industry. Yeah, that’s really, it’s a good point. I mean, yeah, you do want to be working with professionals, right? I mean, you want somebody that is, that knows their worth and has earned it. And I, and I think honestly, that’s one of the ways I view this change is, is really an opportunity to really iron out my scripts and how I present, you know, my worth and what I bring to the table, whether that’s on the seller or the, or the buying side.

[54:53] Um, but yeah, that’s a, that’s a really good point. Like you, if what, what, what fiduciary duty would somebody that, you know, isn’t really being represented or whatever have. Yeah. And then why, and why do you want me representing your house, trying to get you the best price? If, if we’re, if we’re haggling over a couple of percent here on the front end, like would she be overjoyed if I got you your price or higher and you had to pay me a commission that was more? Of course you would. Um, but, but, but if you know, if that, that just, that just is, is kind of one of those things now that we’re seeing a lot in this market is the kind of trying to, because we’ve got technology, technology, let’s devalue the people that are getting these things done.

[55:37] Well, we can put all the forms on the platform and just tell them to sign here and sign. We can make it easier, but there still needs to be a negotiation at some point. And there still needs to be somebody that’s advocating on your behalf. And that can’t be a bot. It just can’t. Right. Yeah. Each house is different, uh, too. And there, there are strategies, uh, that I can’t, I can’t, I try to sit down and tell people, you know, like a kind of a game plan, but I can’t really, really get into it until we, you know, if we’re, if we’re finding a house that we’re putting an offer in, we have a specific strategy for that house, for that offer, for how many other offers there are. It just all depends. And yeah, like you said, there’s no algorithm that can figure that out, um, for, for each specific house.

[56:24] If it’s, yeah, if it’s, you know, new construction and there’s 16 houses that are all the same price and there’s no negotiations involved. Yeah. It’s a little different, but there’s still things that happen there that, that are important. Um, yeah, man, this has been a fantastic conversation so far. We’ve probably could spend hours because there’s definitely more we could get into. I’ll be back. No, but I do want to ask about your, uh, your favorite book. If there’s been one that’s been just fundamental for you, uh, in, in mindset or in business development or just a fun book that you’ve enjoyed here recently. Yeah. I, I mean, I always tell people and I, I, I, I’ve been on other podcasts and I still mentioned this book because it’s been, it was such a huge influence on my life and it’s called the hard thing about hard things.

[57:11] Um, and, and when we talk about building a business and running a business, a lot of the books that we read have to do with how do I not step in it? Right. Or how do I avoid this or that? This book is kind of Ben, uh, Horowitz view of how he broke, how the business was broken and how he had to fix it. And so it basically goes into some very, very detailed things about team building and the people that you’re working with. And though it seems like a topic, many people have discussed before, I’ve never seen somebody with as many real kind of, um, uh, real perspective that is not mainstream, which, which I think it’s, it’s interesting. And then the other book I recently read, which I’m probably a little bit behind is that I think it came out 10 years ago, maybe eight years ago was innovators.

[58:07] I don’t know if you read that, but Walter Isaacson really about kind of a lot of the tech innovators. And I think that book is fascinating because you would think it’s a technical read with a lot of, about the internet and, and tech in general, but it’s written so clearly and precisely that, uh, I think almost anybody who’s trying to do something against the grain in any business, uh, would, would, uh, would get something from. That’s awesome. Those are two, uh, new recommendations. Okay. Good. So awesome. Yeah. Those are, those are great. I have such a long reading list. It’s, it’s, it’s hard. Um, but I, I, Walter Isaacson did a bunch of biographies, right? And that’s. Yeah. So he just did the, the Elon Musk and did the jobs and, um, I think he did jobs.

[58:59] I’m pretty sure. Yeah. I’m pretty sure. I think I read that one. Um, but yeah, no, that’s, that’s awesome. Thanks for that recommendation. Now, um, if anybody’s interested in one of your projects that they want to figure out, uh, I guess this would probably be on the C side of things. Uh, could they reach out to you, um, to, or is there, is there a resource or website that they could go to, uh, find information about upcoming projects and deals? Yeah. And we, and we always have, uh, bees available for people that, that we do know, or we can create a relationship over time and something in the future might come about. But yeah, legacy acquisition, legacy acquisitions, please check on our, our website.

[59:36] We’ve got a lot of resources too, for people that are interested in investing. Okay. And then, uh, I always like helping people out. Matias, as I know you do. So on LinkedIn, we’re pretty accessible and be happy to kind of walk through any folks that, that need some guidance. I mean, we got here with mentors, so I realized the value and want to be that for somebody. If there’s a reason to. That’s awesome. Thank you so much, Andy, for that. And thanks so much for being a guest on the show. It’s been a really interesting conversation. Um, yeah, really appreciate it. Yeah. Thank you, Matias. I’m really happy to be here. Thanks for listening to the REI agent. If you enjoyed this episode, hit subscribe to catch new shows every week.

[1:00:16] Visit REIAgent.com for more content. Until next time, keep building the life you want. All content in the show is not investment advice or mental health therapy. It is intended for entertainment purposes only.