Oil and Gas for Real Estate Investors

Energy is the key input for all economic activity. And as populations and economies grow worldwide, there’s an increasing demand for energy.

So listen in as we chat with an experienced oil man and discuss the nitty-gritty of investing in oil and gas for profits and tax breaks.

In this episode of The Real Estate Guys™ show, you’ll hear from:

  • Your well-oiled host, Robert Helms
  • His slightly creaky co-host, Russell Gray
  • Oil and gas businessman, Bob Burr

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How we got into oil and gas

We’re often asked how we transitioned from real estate to other real assets.

We started studying economics after the ’08 financial crisis. We were looking to see what we could have done … to better survive the crash.

We realized we needed to be more careful about structuring our portfolios so they weren’t vulnerable to the ups and downs of Wall Street.

We also realized the dollar, gold, and oil were all interconnected.

And, we looked at the tax benefits, and realized the tax path leads to oil.

Our guest today is basically the Godfather of Gas and Oil. Bob Burr started out in the gas and oil industry working on rigs as a young man in Louisiana.

“It was my life’s mission to find out the other end of the business,” Bob says.

Well, he’s made it … Bob now has several cumulative decades on the money-making side of the oil and gas industry.

And he’s still at it … technological innovations and new oil discoveries have made the U.S. one of the top places in the world for oil extraction.

Bob’s decades of experience have led him through ups and downs, mistakes and discoveries, and he has come out wiser on the other end. He met us on the Summit at Sea™ … and now he’s here to share his knowledge with YOU.

The tax benefits of oil investing

So … why oil and gas?

“The tax shelter is just tremendous,” Bob says. Oil and gas investing is the only business today where you can put in a dollar and write off 70 to 80 percent of that, whether you win, lose, or come to a draw.

There are risks inherent to investing in the industry, but the federal government makes it much more approachable by subsidizing heavy tax breaks.

“Every time you drill a well, you’re gambling,” Bob says. But since oil drives the economy, Uncle Sam is willing to place some bets.

Bob does a lot of due diligence before he even starts digging to make sure a potential well has a high chance to be profitable for him and his partners.

First, he explores the land and picks out a bunch of prospective sites.

Then, he sends those prospects to a third-party geological team and says, “Kill it.” Really. If the geological team comes back and says no go, Bob moves on.

After the geological team gives the A-OK, Bob does yet another evaluation. His sons do a due diligence inspection to examine specific site issues.

“We’ll have some bad ones regardless, but I’m doing everything to avoid that,”  Bob says.

Oil and gas exploration is a numbers game, but Bob is shaving the odds in his favor. He’s eliminating 90 percent of the bad options … before the drilling starts.

Oil and gas investing is an industry that requires high responsivity to partners.

Because it is a high-risk industry, Bob makes sure he is being attentive to his investment partners’ needs.

“We need to shut up and listen and let them present the facts,” Bob says. If there’s ever a point where he disagrees, he consults with specialists and experts first.

Bob has been in the business a long time. “I would be lying if I never did anything wrong,” he says. “I had to climb the mountain and fall back down, climb the mountain and fall back down.”

But now, “You can’t play any tricks on me,” he declares.

Who gets a cut?

How does oil and gas investing work for everyone involved?

First, there are the land owners. In usual oil and gas terms, the land owner owns the surface and minerals. The oil extractor … that’s Bob … gives the owner a bonus for each acre used, plus royalties … a percentage of the total proceeds.

“You have to look at the economics,” he says, in reference to the royalty rate.

If an oil person is pulling in millions of dollars, the reserve rate … what they take home to investors and their own business … will be less, perhaps closer to 50 percent. For a smaller pull, it’ll probably be closer to 80 percent.

“You have to play every hand differently,” Bob says. There are a lot of variables that affect each situation.

Now, what about the investors?

Becoming a partner to Bob or another oil person requires taking on a lot of risk. But regardless of the outcome, investors still get tax benefits.

Bob says he does turn-key deals on each well, and he takes on the responsibility of figuring out completion costs and risk.

If he runs into problems, he doesn’t go back to his investors to ask for more money, he says … but if there is a chance to drill deeper and get much higher profits, he will sometimes give investors an opportunity to put more money in and play the game.

As for the profits? “I’ve never had one problem having a market for oil at a premium price,” he says.

Bob recently got about $70/barrel for West Texas crude, but he says he can make money at as low as $25/barrel … so there’s a lot of flexibility. Twenty-five is still a good, solid return, he says.

The oil industry is all about developing relationships … after all, we only got to know Bob through the great relationships we form each year at the Summit at Sea™.

“I’m a team with my partners, and I’m the captain of the team,” Bob says. “And I want to score.”

Think you want to learn more about oil and gas investing? You can start your research with Bob’s custom report. And of course, you can meet Bob and other experienced investors at our annual Summit at Sea™!


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Seven lessons for better investing …

With less than 7 weeks remaining in 2018, we’re taking a short break from our obsessive-compulsive perusal of the financial news.

Because with an exciting New Year about to begin … full of hope, challenges, and opportunities … it’s a great time to focus on some important fundamentals.

Lesson# 1:  Invest in yourself first and frequently

Think of the amount of money you put into fixing up a property in the hopes of generating a few thousand dollars of profit or cash flow.

How much MORE important are YOUR education, skills, and network over the rest of your career?

For a fraction of what you’ll spend sprucing up just a single property, you can increase your sales skills, gain more strategic clarity, expand your economic education, and grow your professional network.

Any ONE of those things can pay you back 10x or more in just a few years.  Plus, investing in your education and networks sets you up for …

Lesson #2:  Focus on relationships, not transactions

Sure, we understand you need to do deals … to produce profits … so you can pay the bills and keep investing.  But transactions are really just a by-product of great relationships.

When you put the transaction over the relationship, you risk killing the goose that lays the golden eggs.

And remember, every person you know knows MANY more people you don’t.

So even if the person in front of you isn’t ready to do a deal today, someone they know might be.

This is where YOUR education and network come into play …

When you know things other people don’t, but need to … or when you know people other people don’t, but need to …

… YOU have something of great value to enhance a relationship or work through one contact to reach another.

Most people won’t give you a referral if they think you want to sell their referral something.

But they’ll happily connect you if they think you will HELP their referral.  That’s based on trust, which is based on the relationship.

It sounds so easy … and it is.  But for some reason, most people focus on the small value of the transaction and miss the HUGE value of the relationship.

Lesson #3:  Emphasize mission and values

The old adage says, “People don’t care how much you know, until they know how much you care.”

It’s true.  But it goes further …

People do business with people and brands they trust.  And when you focus on mission and values, and filter all you say and do through them …

… over time, you’ll create a trustworthy reputation.

Of course, a good, trustworthy reputation will attract more people into your life … and that means more relationships, and ultimately, more deals.

Lesson #4:  Build a business and portfolio that works for YOU … and not vice-versa

We’re old enough to remember when Michael Gerber’s now classic title, The E-Myth, was the hot new business book.

But the timeless lessons are as applicable today as ever.

Too many people … employees, entrepreneurs, and investors … do the “two-step.”

They set out to do whatever they can find to make money based on the belief that if they can just make enough money, THEN they can go do what they REALLY want.

The problem is when you don’t love what you do, either you let off the gas and never really succeed …

… or worse, you lose yourself in service to a business, portfolio and lifestyle you don’t really enjoy.

And then you just hold your breath until the day you can sell it or retire on your investments.

Better to ask yourself EARLY what’s really important to you … how you want to live … what you love to do … and then build a business and/or portfolio around THAT.

It’s a harder problem to solve, but you’ll LOVE the answer when you find it.

Lesson #5:  Develop and maintain a clear vision

We all run around with pictures in our mind. How we see the world … how we see ourselves … what we’re working to accomplish.

The challenge for many is the picture is fuzzy.

It’s like driving in the fog.  You have a sense of direction … but aren’t exactly sure how to get there.

You’re feeling your way … scared to go too fast and miss a turn or fall into a ditch.

Yet some people are taking bold action and moving aggressively through life.

What’s the difference?

Clarity.

Bold action takers can “see” exactly where they’re going, what they’re building, and WHY … and that vision inspires and emboldens them to move towards the goals with enthusiasm and confidence.

We say, “When you have clarity of vision, strategy and tactics become evident.”

So when you’re not sure what to do, focus on your vision.  Just seeing the end from the beginning is often enough to tell you what to do next.

Lesson #6:  Always see the downside

Really?  Doesn’t focusing on the negative create paralysis?

Only for amateurs.  Pros are more afraid of what they DON’T see than what they do … because you can’t avoid or manage risks you aren’t aware of.

Billionaire real estate investor Sam Zell says everyone sees the upside.  That’s what they look for and what motivates them to go for it.

But Zell says his success comes from being able to see the DOWNSIDE too …  and then making plans to mitigate it … even if it means walking away.

Pessimists ONLY see the downside and can’t act.  Optimists only see the upside and hope for the best.

We’re pretty sure hope is not an investment strategy. Be a realist and get good at seeing and managing risk.

Lesson #7:  Always pay attention to cash and cash flow

Profit and net worth are important.   Cash and cash flow are essential.

A business mentor of ours once taught us that cash is like oxygen, while revenue is like water, and profit is like food.

You can survive for a long time without profit … if you have revenue and cash.

You can survive for a little while without revenue … if you have cash.

But run out of cash … and you’ll be dead very soon.

Pre-politician Donald Trump once told us it’s always good to have cash in the downtimes. We say, “Cash Flow controls and Cash Reserves preserve.”

So have some liquidity at all times. Write off the lost opportunity cost on the cash as an insurance premium.

And do NOT count on credit for liquidity. We did that once … and it didn’t end well.  Lenders tend to cut off credit when you need it the most.

Bonus Lesson:  Use firewalls to avoid portfolio contagion

Let’s face it.  Some investments are more risky than others.

But if you don’t have firewalls, then just ONE risky investment can implode your entire portfolio.

You might have a solidly built, cash-flowing portfolio of properties, and a high net worth with good liquidity, and hedges against inflation and deflation.

But just ONE lawsuit, or personal loan guarantee on just ONE risky deal, or pulling money out of performing property or business to feed a loser …

… and EVERYTHING goes … UNLESS you use legal structures, mental discipline, and emotional control to isolate risk.

It’s a bigger topic than we have time for here, but we address it in ourIntroduction to Strategic Real Asset Investing webinar.

You can get the webinar as a free bonus when you order the Future of Money and Wealth video series … which is a great primer on several risks ALL investors should be paying attention to right now.

Until next time … good investing!


More From The Real Estate Guys™…

The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training, and resources to help real estate investors succeed.


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The mid-term morning after …

If you’re an American, unless you’ve been in a coma or living under a rock, you know the United States just had one of the most energetic mid-term elections in quite some time.

The day after, both sides are disappointed … and both sides are claiming victory.

One of the advantages of being older is we’ve seen this movie before.

In our younger days, when elections didn’t go our way, we thought it was the end of the world.  Today, not so much.

It doesn’t mean we don’t care.  We do.  And certainly, politicians and their policies have a direct impact on our Main Street investing.

But it’s in times like these we’re reminded of the beautiful, boring stability of real estate.

Because while all the post-election drama and speculation plays out, people still get up and go to work and pay their rent.

And though the Trump-train just got slowed … like Barack Obama before him, big chunks of his agenda got pushed through early … and are likely here to stay for a while.

In other words, it doesn’t look like Obamacare or the Trump tax reform will be repealed any time soon.

More importantly, investors of all stripes … paper and real … now know what the lay of the land is for the next two years.

Early indications (based on the all-green dashboard of Wall Street) reveal there’s cash on the sidelines waiting to see what happened … and now that gridlock is the answer… money is pouring into everything.

We know that sounds counter-intuitive.  But while political activists push change … too much change too fast makes money nervous.

Investors and entrepreneurs need to make decisions about long-term risk and reward.  And when the world is changing too fast, those decisions are harder to make.

Way back in the lead-up to the 2010 mid-terms, we penned this piece about a concept we call “healthy tension.”  Just change the team colors and it’s just as applicable today as it was back then.

The point is that money and markets like gridlock.

At this point, from an investing perspective, it doesn’t really matter if any of us like or dislike what happened … politically.  It’s done.

Now we all just need to decide what it means to us and how to move forward … because life goes on.

So bringing it all back to Main Street …

We’re guessing all the great Trump-tax reform benefits for real estate investors… from bonus depreciation to Opportunity Zones … are here to stay.

And as we said just a week ago …  there’s probably a lot more money headed into real estate.  Nothing about this election appears to change that.

So gridlock inside the beltway means stability on Main Street.

Sure, it might be a little boring.  But real estate investors are used to boring.  And when it comes to long-term wealth building … boring is good.

Until next time … good investing!

More From The Real Estate Guys™…

The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training, and resources to help real estate investors succeed.


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Opportunity Zones – Reduce Taxes by Investing in Main Street

It’s easy to figure out where tax incentives lie in wait. Just study the tax code.

The latest version of the tax code introduces a new tax shelter … opportunity zones. But … what are opportunity zones?

In this episode of The Real Estate Guys™ show, we dive into what we know about opportunity zones … including three MAJOR benefits.

You’ll hear from:

  • Your opportunistic host, Robert Helms
  • His inopportune co-host, Russell Gray

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Opportunity zones: The basics

There’s a way to pay no tax on certain investments AND heal struggling communities. We’re talking about opportunity zones.

These new geographic tax shelters are encoded in the version of the tax code passed in 2017 … but they’re not totally finalized yet.

That doesn’t mean they’re not important … savvy investors will be absorbing all the info they can BEFORE opportunity zones go into action.

The idea of opportunity zones is to offer a tax-favored investment vehicle for people who already have capital gains in other investments.

Opportunity zones will be located in low-income communities ripe for revitalization … and will be located in every state in the U.S.

The fundamental purpose of opportunity zones is to encourage long-term investments in struggling communities.

Congress has established an incentive framework that is flexible and unique. This is essentially a new class of investment.

These opportunity zones complement existing community development plans. In essence, the project is treating the U.S. like a giant rehab project.

You’ll basically be moving yourself into a pre-identified path of progress. There hasn’t been a ton of incentive for investors to come into these run-down, lower income areas. But NOW there is.

The benefits of opportunity zones

Like we said earlier, the idea of opportunity zones is set, but the legislation is not in action yet. The appropriate documentation and legislation will be in place by the end of 2018.

So NOW is your time to prepare for the future.

There are definite differences between this opportunity and other investments. Generally, you’re required to pay tax when you liquidate capital gains.

But investing in opportunity zones provides three unique tax benefits. Before we get into those, we do want to clarify … this investment is only available for investors who already have capital gains from previous investors.

But not to worry … if you’re a newer investor who doesn’t have any capital gains yet, there are ways to get in on the action. We’ll get into those in the next section.

Now, the three tax benefits …

  1. You can defer your original capital gains tax for up to 10 years. As you probably know, it’s always better to defer taxes than to pay now.
  2. You also get a 10 to 15 percent discount on your original capital gains tax.
  3. AND …when appreciated capital gains are put into an opportunity zone investment, the gains you make from that investment are completely tax free.

There is a timeline. You have to sell the appreciated assets and invest the capital gains into one or more opportunity zone investments within 180 days.

But we want to emphasize … your capital gains from properties in opportunity zone areas will be completely TAX FREE.

No capital gains? How to invest in opportunity zones

The government has a goal here … they want to bring a ton of investment capital to certain areas and swing them around.

In that vein, there is a certain requirement you have to follow to invest in opportunity zones … there is NO tax incentive if you own property in an opportunity zone under your own name.

You have to invest in opportunity zones through opportunity funds.

If you don’t have appreciated assets, you may be wondering how you can start an opportunity fund and get in on this great opportunity.

There are a few options …

  1. Invest in an area near an opportunity zone. You’ll be boosted up by the wave of capital increasing asset values all around you.
  2. Invest as a syndicator. Set up an opportunity fund … and get other investors to contribute their capital gains.

This last point is something to seriously consider … especially when you start thinking about the stock market.

The stock market is hot, but it’s showing signs of faltering. People want to take their capital gains out … but they don’t want to pay taxes.

A fantastic solution? Opportunity funds.

All about opportunity funds

What does it take to put together an opportunity fund?

Opportunity funds do not have investment limitations.

They must be organized as a corporation or a partnership.

They do not require official IRS approval … the fund manager can self-certify the fund simply by submitting a form to the IRS.

The process is designed for speed. It cuts out bureaucracy … and brings locally driven change to areas that need it.

But it also requires investors to make REAL change … for example, one requirement we expect to see is that investors put as much into rehab and construction as they spent to acquire the property.

Opportunity zones mean sending money to the bottom of the market … and making the subsequent changes LAST for the long term.

For a map of tagged and categorized opportunity zones, plus more information, simply send us an email at opportunityzones [at] realestateguysradio [dot] com.

And don’t think this is the last you’ll hear about opportunity zones … we expect this to be a BIG wave in the real estate investing sea, and we’ll be providing more information to our listeners as this new opportunity develops.


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There’s MORE money headed into real estate …

In the swirling sea of capital that makes up the global economic ocean we all invest in …

… big fund managers are pay close attention to a variety of factors for clues about the ebb, flow, and over-flow of people, business, and money.

Right now … it seems like a BIG wave of money could be headed into real estate.

Of course, compared to stocks, these things aren’t simple to see and track.  And they’re even harder to act on.

Stocks are easy … if interest rates fall and money floods into stocks, you just buy an index fund and enjoy the ride.

Just remember … the dark side of easy and liquid is crowded and volatile.

So unless you’re a seasoned trader, trying to front run the crowd to both an entrance and exit in stocks can be a dangerous game.

But real estate is slow.  It’s inefficient.  It moves slowly.  There’s drama.

And yet, the BEAUTY of real estate is its messiness.  Embrace it.

So here’s why we think more money could be flowing into real estate soon …

Opportunity Zones

We’ll be talking about this more in the future, but the short of it is the new tax code creates HUGE incentives for current profits from ANYTHING (including stocks) to make its way into pre-identified geographic zones.

According to The Wall Street Journal,

“U.S. is aiming to attract $100 billion in development with ‘opportunity zones’…”

“could be ‘the biggest thing to hit the real estate world in perhaps the past 30 or even more years’ …”

 Private Equity Funds

 Another Wall Street Journal article says …

“Real estate debt funds amass record war chest

“Property funds have $57 billion to invest …”

Pension Funds

This Wall Street Journal article indicates BIG pension funds are getting into the game too …

“Big investors like the California teachers pension are backing real-estate debt funds …”

One reason savvy investors watch economic waves is to see a swell building … so they can paddle into position to catch a ride.  It’s like financial surfing.

Time will tell where all these funds will land, but it’s a safe bet it won’t be in smaller properties.  MAYBE some will end up in residential mortgages, but don’t count on it.

So what’s the play for a Mom and Pop Main Street investor?

Start by watching the flow …

We’ll be watching the markets and product types the money goes into.

Then we’ll be watching for the ripple effect … because that’s probably where the Main Street opportunity will be.

For example, if money pours into a particular geography, it’s going to create a surge of economic activity … especially if the funds are primarily used for construction.

But we’d be cautious about making long-term investments in any place temporarily benefiting from a short-term surge … so it’s best to look past the immediate impact.

Think about the long-term impact … which is a factor of WHAT is being built.

Fortunately, major projects take many months to complete … so they’re easy to see coming IF you’re paying attention.

We like to plug into the local chamber of commerce to track who’s coming and going in a market place … and why.  The local Business Journal is also a useful news source to monitor.

The kinds of development that excite us include factories, office buildings, industrial parks, and distribution centers.  Those mean local jobs.

We’re less excited about shopping centers, entertainment centers, and even residential and medical projects.

Because even though they mean jobs too … they don’t DRIVE the economy.  They feed off it.

Of course, we’re not saying those things are bad … but they should reflect current and projected growth … not be expected to drive it.

Hopefully, developers are doing solid market research and are building because the local population and prosperity can absorb the new product.

Then again, when money is aggressively pumped in, sometimes developers get greedy … and areas get OVER-built.

So don’t just follow the big money.   Be sure you understand the market.

Watch for the over-flow too …

Sometimes money moving into a market creates prosperity only for some … and hardship for others.

Silicon Valley is a CLASSIC example.

As billions flood into the market through inflated stock prices, many people get pushed off the back of the affordability bus.

But even though it’s hard for those folks, they end up driven into adjacent markets which are indirectly pushed up.  It’s overflow.

That’s when you see headlines like these …

Boise and Reno Capitalize on the California Real Estate Exodus –Bloomberg, 10/23/18

“Sky-high housing prices in the Golden State bring an echo boom—and new neighbors—to other Western states.”

Sure, in Silicon Valley’s case, the flow of money is cheap capital pouring into the stock market and enriching tech companies … and their employees.

But it doesn’t matter which door the money comes in when it flows into a market.  That’s why it’s best to look at ALL the flows into a market.

And when the flow of capital drives up investment property prices in a market (depressing cap rates), even investors will overflow into secondary markets in search of better yields.

The lesson here is to watch the ebb, flow, and overflows as capital pours into both the debt and equity side of real estate through Opportunity Zones, private equity funds, and increasing pension fund allocations.

You never quite know how the market will react, but you can be sure it will.

The key is to see the swell rising early so you can start paddling into position to catch the wave.

We do it by looking for clues in the news, producing and attending conferences, and getting into great conversations with the RIGHT people.

We encourage YOU to do the same.

Until next time … good investing!


More From The Real Estate Guys™…

The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training, and resources to help real estate investors succeed.


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Halloween Horror Stories – 2018 Edition

Welcome to our annual edition of Halloween Horror Stories … real world accounts of real estate deals gone horribly wrong.

We’re honored our guests chose to share their horror stories with us. They also discuss what they discovered in the process … so YOU can learn what NOT to do.

In this Spooktacular episode of The Real Estate Guys™ show, you’ll hear from:

  • Your spooky host, Robert Helms
  • His spooked co-host, Russell Gray
  • Investors Sep Bekam
  • Todd Sulzinger
  • Michael Manthei
  • Brad and Emily Niebuhr
  • Silvana Shull
  • Lane Kawaoka
  • David Kafka
  • and Ryan Gibson

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The shot heard ‘round the neighborhood

Our first story comes from investor Sep Bekam. Sep bought a 36-house parcel and started making repairs and raising rents to market price.

But this made one particular tenant less than happy.

You see, the existing tenant was occupying two houses … one for personal use and one for their daycare business … and the rent raises meant they had to downsize.

But that’s life. Sep put a Section 8 tenant into the newly unoccupied property and thought that was that.

Six months later, he found out there had been a drive-by shooting. Turns out the Section 8 tenant had a teen involved in gang and drug activities … not the kind of thing you can find out on a background check.

The Section 8 tenant moved out shortly afterward, and Sep started the process of putting a third tenant in the house. But the old tenant … the daycare owner … still wasn’t happy. They started interfering with the leasing agents, trying to scare off prospective renters.

Still, Sep found a new tenant and everything seemed okay again … until about a month later, when the tenant heard loud shots.

Turns out the disgruntled neighbor had fired a paintball gun at the new tenant’s house … then told them about the previous drive-by shooting.

The solution … Sep made an agreement with the new tenants to put in a state-of-the-art security system so they would feel safe.

The takeaways … Crime sometimes happens, no matter how many safeguards you have in place. Sep says it’s important to mitigate the problem WHEN it happens so it’s not associated with the neighborhood.

And keep in mind, Sep has a portfolio of over 100 houses. He reminds investors to not get discouraged … these kinds of horror stories are the exception, not the rule.

The bankrupt builder

Todd Sulzinger started investing his self-directed IRA funds in 2011.

He found a developer building fourplexes who was looking for hard-money loans and decided to sign on.

A few months later, one of the developer’s major suppliers went bankrupt. And then … the developer went bankrupt too.

Because Todd was only in on a portion of the fourplex, he couldn’t foreclose.

The solution … Todd did his best to fight for the money held in the construction management company. Unfortunately, he never recovered all of his money, and what he did get back didn’t return until years later.

The takeaways … “Don’t do a hard-money loan on a fourplex,” Todd says. Know exactly where your money is going BEFORE you make a loan, and understand what will happen in a worst-case scenario.

Also, make sure you can foreclose on a property. And evaluate the risks of any loan or investments. If you’re unsure … ask questions. The vetting process should take time if you’re doing it right.

The mysterious doorman

Michael Manthei’s troubles didn’t start when he bought a 10-unit building in a rougher neighborhood … they started when he replaced one tenant with an older gentleman who seemed like a nice guy.

Soon after the tenant moved in, water started leaking from the apartment into the commercial space downstairs.

Then, there was a death in the apartment.

Turns out, the new tenant had been charging homeless people $10 to shower at his place. He let one woman stay overnight … and she overdosed and died. The man was even running a prostitution operation from the apartment.

The solution … “We kindly asked him to leave, and he complied,” Michael says. That wasn’t the end … the apartment was in bad shape and had to be gutted and cleaned.

The takeaways … Don’t trust your intuition more than the process.

Michael now makes sure new tenants complete an application, do a full criminal and eviction background check, and supply references and employment history before he will even consider them.

He considers that process an investment … on getting quality, long-term tenants.

The curious sucking sound

Brad and Emily Niebuhr do a lot of mixed-use deals. But in one property they bought a few years ago, things went terribly wrong.

First, there was the love triangle. One tenant had her boyfriend added to the lease … but a few months later, the boyfriend moved into the apartment of a DIFFERENT tenant.

But that’s not the horror story.

People started to hear lots of noise and banging … including odd sucking sounds … coming from the second tenant’s apartment. Then, water started to leak from the apartment into the commercial space below.

Turns out, the tenant and her new boyfriend had jaunted off to Alaska, but not before illegally subletting the apartment.

The subletter had an issue with the bathtub drain … but since he didn’t want anyone to know he was there, he was using a Shop Vac to drain water from the bathtub, sometimes as many as 13 times a day.

Even worse … the new subletter was allegedly a drug dealer who brought an unverified service dog onto the property.

The solution … Emily and Brad did a property inspection and gave the subletter notice, and he quickly moved out. They also fixed the drain issue.

The takeaways … If you couldn’t tell, Brad and Emily were managing the property without the help of a property management team. They told us that now, they wouldn’t go without one.

They also realized that investments are about more than the numbers. Even though the mixed-used property had amazing cap rates and returns, it was in a rural area, and they couldn’t find a property manager.

Although they finally have property management now, it took a lot of searching. “There’s a learning curve to the due diligence process,” the couple says.

When disaster strikes

In 2008, Silvana Shull had a successful business in Japan … a large retail furniture and interior design operation. She bought and designed a custom showroom because the numbers made sense.

But right after, the economy started to shift.

She was able to manage for about three years … until 2011 and 2012, when Japan was struck by a series of natural disasters, including tsunamis and earthquakes.

The operation was destroyed.

Silvana had to make a decision … cut her losses and try to rebuild, or close her business entirely and try to recover what she could.

The solution … Silvana sold the building she bought for less than 10 percent of what she originally paid. She shipped all her remaining inventory to Hawaii, where she eventually was able to sell everything … but the entire process took seven years of daily, dedicated effort. And she did it all while taking care of her two small children.

The takeaways … Running an international operation isn’t easy and requires a team. “I didn’t listen to advice and thought I could do anything,” Silvana says.

If she were to do it again, she would listen more and move slower. Although it’s impossible to control natural disasters, Silvana says it probably didn’t make sense to expand in Japan, considering she was living in Hawaii at the time.

The incredible shrinking IRA

Lane Kawaoka is a podcaster, like us. His show is called Simple Passive Cashflow.

He is also an investor who has made a few mistakes.

When he was starting out, Lane wanted to use his self-directed IRA to invest in a passive deal, but he didn’t know many people.

So, when he got a referral, he didn’t do much investigating. Lane invested $43,000 … almost his entire IRA fund … in a deal that looked pretty good on paper.

But then he started networking with other limited partners and heard the operator wasn’t the most scrupulous person. A year later, Lane got a letter that said his deal had gone south.

Lane was left with a property that needed $20,000 worth of repairs in a tertiary market with long selling times.

The solution … Lane wrote off the loss and eventually fire-sold the property. He was left with only $7,000 in his IRA fund.

The takeaways … “Don’t work with someone you don’t know, like, or trust. And don’t lose focus on building relationships with other peer investors,” Lane says.

Trouble in paradise

This story comes from an investor outside of the U.S. … David Kafka. David is located in Belize.

One day, David got a call from an employee. The police needed him to identify a body. Turns out, it was a client of David’s … he had just listed and sold her house.

There were some questions floating around about whether the client had actually wanted to sell, and David had the keys to her house. He was worried he might be a suspect. But he was even more worried about finding the actual killer.

The solution … Eventually, David ended up closing the deal. And he realized he wasn’t a detective and couldn’t solve the murder. He had to extricate himself.

The takeaways … Dot your I’s and cross your T’s, says David. When the unexpected happens, you want to put yourself in the best possible position.

Also, remember that sometimes bad things happen to good people … and that many things are simply out of our control. So, be compassionate and have fortitude, but keep your nose out of things that aren’t in your jurisdiction.

A red-hot deal

Our last horror story comes from investor Ryan Gibson.

Ryan invested in a condo-conversion development opportunity, converting an existing single-family home into condos.

He had great insurance … probably a little too much, he says. But that insurance came in handy when someone broke in and started a fire two months before the condos were set to be finished.

Ryan was on vacation in Hawaii when he got the call, but he had a local contractor on the ground who could help manage the situation.

The solution … Ryan immediately sent an email out to his investors. He also informed his lender, a bank, right away. And he submitted an insurance claim, which luckily covered the damage to the dollar.

The fire extended the entire process by about three months, but in the end, Ryan was able to offer his investors a return over 50 percent.

The takeaways … “If it can go wrong, it probably will,” says Ryan. So always be over-insured. And remember, “Bad news doesn’t get better with age.”

Be transparent and handle problems as quickly as possible … and make sure you have eyes and ears on the ground to help you out when times get tough.

How to handle a horror story

In stressful times, attitude plays a big role. But what really matters is asking the right questions:

  • What happened?
  • Why did it happen?
  • How can I resolve it?
  • What can I learn?

That way, you can turn your horror story into a learning experience that will help you be an even smarter investor.


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The future of interest rates …

WOW … the news is FULL of things to keep an investor awake at night.

Some of it’s so exciting, you can’t wait to seize the opportunity.  Other things are so spooky, you want to pull the covers up and hope it’s just a Halloween gag.

Right now, stock market investors are learning it can be a mistake to try to ride the bull all the way to the peak … squeezing every drop of paper profit out …

… falsely believing you can beat the bears to the exit.

Stocks fall for 12 of the last 14 trading sessions – Yahoo Finance, 10/23/18

Yeah, but that’s Wall Street …

Existing-Home Sales Decline Across the Country in September – National Association of Realtors, 10/19/18

Oops.  Meanwhile …

Homeowners poised to start tapping $14.4 trillion in equity – CNBC, 10/19/18

Big banks reveal challenges in consumer credit, mortgages – Yahoo Finance, 10/15/18

“banks are seeing challenging headwinds … as charge-off rates – a measure of defaulted balances –  continue to rise.” 

So while there are MANY things to like about what’s going on in the U.S. economy …

U.S. named world’s most competitive economy for the first time in 10 years– Washington Post c/o The Chicago Tribune, 10/17/18

We remind you (and ourselves) … the economy and the financial system supporting it are two VERY different things.

That’s why you can have two camps … one saying the economy is strong … and another saying disaster is looming.  And they’re BOTH right.

Of course, “disaster” does NOT mean the end of the world … or a descent into some Mad Max post-apocalyptic anarchistic society.

Disaster can be as simple as a rapid shift in asset or currency values that the majority of people are on the wrong end of.

Just like the 2008 crisis ( a warm-up for what Peter Schiff calls The Real Crash which is yet to come) …

… those who were not aware and prepared got CRUSHED … while those who were made MILLIONS.

So “disaster” isn’t a universal experience when the economic winds shift suddenly.

It’s more a personal choice (often by default from neglect) and depends on the set of YOUR personal financial sail.

You’ll either get capsized, face severe headwinds … or you’ll catch a gust of wind at your back and sail on to new fortunes.

So watching the changing economic winds is an important responsibility of any serious investor.

Interest rates are the barometer which signals a change in the economic winds.

That’s why pro investors fixate on every move or utterance of the Federal Reserve, which is ONE of the most powerful influencers of interest rates … but NOT the only one.

No investor left behind …

 Interest rates are a by-product of the bid on bonds, which are debt securities.

So if the U.S. Treasury decides to borrow money (which they do ALL the time), the bid on those securities sets the yield.

The lower the bid, the higher the yield and vice-versa.

Falling interest rates (yields) come from a STRONG bid on bonds.  That is, there’s lots of buyers for bonds relative to the supply of bonds for sale.

When the Fed wants to push rates down, they add to market demand by BUYING bonds … bidding UP the bond price and driving DOWN the yield.

Are you with us so far?

But when the Fed wants to push rates UP, they do NOT bid on bonds (leaving demand up to the open market without the Fed’s bid).

Sometimes, the Fed will even SELL bonds they already own (“unwinding their balance sheet”) … adding to the supply offered by the Treasury (and other sellers like RussiaChina and even Japan).

And more supply and less buyers means bids go down … so yields go UP.  Make sense?

Apparently, government officials aren’t concerned about soft demand for Treasuries …

Treasury Secretary Mnuchin: I won’t be ‘losing any sleep’ if China dumps US bonds in retaliation over trade – CNBC 10/12/18

“If they decide they don’t want to hold them, there are other buyers …”

Okay then. No worries.  But …

Foreign Buying of U.S. Treasurys Softens, Unsettling Financial Markets –Wall Street Journal, 10/23/18

“Yet it is clear that the foreign pullback has helped fuel a bond selloff this fall, which has driven the 10-year yield to 3.17% and has shaken the nine-year-long rally in U.S. stocks …”

There’s a reason stocks are tanking and it has little to do with the economy.  That’s why President Trump is so upset with the Fed.

But it seems to us rising interest rates could be bigger than the Fed.  And the world looks different if the Fed loses control of interest rates.

Head spinning yet?  That’s okay.  It can be complex.  But there’s a reason big money watches the bond market like a hawk.

We try to keep is simple and just focus on the big concepts and how they trickle down to our Main Street investing …

More bonds than buyers mean rates are likely to rise.

For real estate investors, it means downward pressure on values … and more caution when using short-term financing.

Of course, when you can lock in long-term rates, today’s debt actually becomes an asset over time.  But that’s a topic for another day.

And just in case the ramblings of two dudes with mobile microphones and a fetish for news articles don’t make the case …

Last Saturday, we paid a visit to the New York home of former Director of the Office of Management and Budget or OMB (like the OMB numbers you see on your tax forms) … David Stockman.

Of course, we plunked down our mics and recorded a FASCINATING interview at his kitchen table … looking out his penthouse window at the stunning New York City skyline.

If you have any doubt Stockman is a world-class brainiac, buy a copy of his EPIC tome, The Great Deformation.

Bring your lunch and dictionary, but it’s totally worth it.  Only Robert Kiyosaki’s copy is more highlighted and marked up than ours.

You may not agree with Stockman’s politics, but he’s well-qualified to have an opinion on economic matters.  So we listen carefully.

Stockman believes even higher interest rates are coming to an economy near you.

So if there’s any doubt all this airy-fairy macro-economic babble matters to YOUR Main Street investing … think again.

And be VERY thankful these things roll out slowly.

There’s still time to re-arrange your portfolio and activities to fall squarely in the “aware and prepared” camp … and NOT in the “WTF is happening?” camp.

Of course, you can’t just float along with the crowd … unless you’re very careful to pick the right crowd.

But even then, it’s dangerous to fall asleep at the controls of your portfolio.

If you’re super studious, you can probably load up on books, podcasts, newsletters, video courses, and news articles … and you’ll be ahead of most.

And if you’re like us, you’ll do all that.

But you’ll ALSO invest to get in the right rooms with the right people so you can have portfolio-saving conversations.

Since you’ve read this far, you should consider joining us at both or either theNew Orleans Investment Conference and the Investor Summit at Sea™.

It’s where we go to get around a lot of REALLY smart people for SUPER enlightening conversations.

And it’s arguably more important RIGHT NOW than in recent memory …

,,, because for many investors, this is the first time in their investing career they’ve faced a rising interest rate environment.

You can learn by trial and error (expensive and painful) … or by gleaning wisdom from seasoned investors and well-qualified subject matter experts.

It’s probably obvious which one we advocate.

Until next time … good investing!


More From The Real Estate Guys™…

The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training, and resources to help real estate investors succeed.


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The Future of Interest Rates and More with David Stockman

We love talking about real estate. But, real estate is only a part of the sea of our economic landscape. Rising interest rates have a HUGE impact on real estate and the economy in general.

That’s why we are talking to one of our favorite former Wall Street and Washington insiders.

He tells us his take on the future of interest rates and the economy … and shares how YOU can capitalize on changing interest rates to make smart real estate decisions.

In this episode of The Real Estate Guys™ show you’ll hear from:

  • Your swimming host, Robert Helms
  • His sinking co-host, Russell Gray
  • David Stockman, former U.S. Congressman and best-selling author

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The U.S. economy is a fantasyland

David Stockman is an expert not only in economic policy, but also in articulating and explaining complex topics in a way anyone can understand.

David’s political path began in college when he worked for a congressman and learned what it took to be a policymaker. He won an election to congress after the incumbent in his district retired.

Later, he was drafted to be a part of Ronald Reagan’s economic team. President Reagan appointed David as budget director, where he helped launch economic policies.

When it comes to economic policy, there are generally two schools of thought … Keynesian and Austrian.

“Keynesianism says basically that you can’t rely on capitalism to grow; you need the helping hand of the government,” David says. “We say get out of the way! The less government the better.”

And of course, limit borrowing and spending.

The other major factor in economics is interest rates … which directly affect home buyers and investors.

“Rising interest rates have historically told Congress to get its fiscal house in order,” David says. “It elicits a reaction in the country that says, ‘You’re crowding out investment that we need in the private sector.’”

But money printing and distortion of the capital market can cause major crashes like the one we endured in 2008. The subprime disaster SHOULD have been a wake-up call to the country.

In the 94 days after the crash, the Fed increased the balance sheet by 150 percent more than in the previous 94 years.

David says that put us on the path of crazy money printing and low interest rates … and has fueled more speculation.

Now, the Fed is trying to stabilize interest rates and has put the economy in a precarious position.

And there’s an important concept for today’s investors to keep in mind as they evaluate the economy … the recency bias.

“If you’re looking just at what happened yesterday or last year, you might lose track of the fact that we’re in fantasyland, and fantasyland is a dangerous place to be,” David says.

Essentially, the Fed realizes that they went way too far for way too long, and that they won’t be ready for the next big crisis. And the deficit continues to grow out of control.

Which means the next crash could be even bigger.

David says that for investors who are borrowing large sums of money to finance their investments, there’s no more dangerous time than right now.

He calls for prudent underwriting today, and keeping an eye toward the future.

Higher interest rates and lower property values are the types of problems that can erase yields.

“Debt can produce wonderful returns,” David says. “But, if you get caught blindsided, it can be a very dangerous thing to wrestle with.”

Shore up investments before the crash

While many pundits are talking about how robust the economy is, it’s important to listen to the people who are sounding the alarm. So, what can happen?

“If we have another crisis, innocent people will be hurt,” David says. People who lost in the dotcom bust and the housing crisis will have similar and possibly even bigger losses.

This time, the fed will not be in the position to bail out the system. And David says that perhaps in the next crash, the Federal Reserve will emerge as the real culprits of economic instability.

One of the big lessons is to stay educated and understand the fundamentals. You can turn a crisis into an opportunity.

What should a prudent investor be doing now to prepare for the next downturn?

“I think that the idea of cash-flow oriented investment is a sound one,” David says, “but the underwriting going forward will have to be more discriminating and careful than ever before.”

This is especially true for commercial investing. It’s important to ensure that tenants can continue to pay their leases.

Above all, David says that being a careful and prudent investor is a more secure place to be.

For investors who didn’t live through 2008 … or even if you did … you can learn from David’s expertise.

Want to learn more from David and keep up with his advice and takes on the economy? Send an email to Stockman [at] realestateguysradio [dot] com.


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Don’t get lost in the lag …

Investors and economists often talk about cycles … business cycles, credit cycles, even news and legislative cycles.

Cycles are the ebb and flow of causes and effects sloshing around in the economic sea we all swim in.  They’re big picture stuff.

For nose-to-the-grindstone Main Street real estate investors, cycles are barely interesting, seemingly irrelevant, and mostly boring.

But a danger for Main Streeters is not seeing something dangerous developing on the horizon.  Another danger is getting lost in the lag.

The lag is the gap between when a “cause” happens and when the “effect” shows up.

For example, in a typical supply-and-demand cycle, a shortage of homes could cause prices to spike.    The effect of the supply-demand imbalance is higher prices, which in turn becomes a new cause.

Rising prices causes builders to increase production … and existing property owners to put their homes on the market … thereby increasing supply.

As supply grows, price escalation slows. If supply overshoots demand, prices might actually fall.  If you’re structured for only rising prices, you might have a problem.

Of course, there are other factors affecting pricing such as interest rates, wage growth, taxes, labor and material costs, availability of developable land, and on and on.

But our point is … an amateur investor often doesn’t see the cause for price escalation (or anything else) until the effect happens.

Once prices rise, they jump in to ride the wave … believing prices will go up tomorrow because they went up yesterday …  and their speculation only adds to the demand and fuels the fire.

At least for a while …

What’s often overlooked is the production pipeline … until the supply shows up and softens pricing.  Near-sighted investors often get lost in the lag.  They’re not sure where they are in the cycle.

It’s what happened to “GO Zone” investors after Katrina and Bakken investors during the shale boom.

Folks bought in during a boom, not considering the “production lag” … and didn’t structure for a slowdown.  When it happened, they didn’t have a Plan B.

It’s a simple example … and before 2008, that was about as deep as our analysis ran.

But the pain of 2008 opened our eyes … and 10 years later they’re still as wide open as we can keep them … because we know there are cycles as sure as the sun comes up.

That knowledge isn’t bad.  In fact, it’s good.  Because when you see the bigger picture, you also see more opportunity.

So we study history for lessons … current events for clues … and we talk with experts for different perspectives.

It sounds complicated … and maybe it is a little … but it’s like the old kids’ game, Mousetrap.

There’s a lot of fancy machinery hanging over our heads …and it’s just a series of causes and effects.  “A” triggers “B” triggers “C” and so on … until it’s in our faces.

But even at the street level with our nose on the cheese, if we watch the machinery, we can see events unfold and still have time to react appropriately.

So let’s go past a simple supply-and-demand example.

Back in 1999, Uncle Sam decided to “help” wannabe homebuyers get Fannie Mae loans … so the government lowered lending standards and pushed more funds into housing.  It seemed like a nice thing to do.

But at the time, observers cautioned it could lead to financial problems at Fannie Mae … even to the point of failure.  It took nine years (lag) … but that’s exactly what happened.  Fannie Mae eventually failed and needed a bailout.

But before things crashed, it BOOMED … and people made fortunes. We remember those days well.  It was AWESOME … until it wasn’t.

Folks were profitably playing in the housing jumphouse from the time the easy money air pump switched on until the circuit blew.  Lags can be a lot of fun.

Because few understood why the party started and why it might end … most thought the good times would roll forever.  So they were only structured for sunshine.

Oops.

People who urged caution at the height of fun … like Peter Schiff and Robert Kiyosaki … were derided as party-poopers.

Of course, they both did well through the crisis because even in the boom they were aware of the lag and the possibility of a downturn … and were structured accordingly.  Smart.

Now, let’s go beyond supply, demand, and mortgages … and look even further up the machinery …

In late 2000, Congress passed the Commodity Futures Modernization Act of 2000.

Doesn’t sound like it has anything to do with real estate … BUT …

This was the birthplace of unregulated derivatives … like those infamous credit default swaps no one in real estate ever heard of …

… until they destroyed Bear Stearns and Lehman Brothers in 2008, while bringing AIG to the brink of bankruptcy, and nearly crashing the financial system.

This mess got ALL over real estate investors in a big and painful way … even though there was an 8 year lag before it showed up.

Remember, for those 8 years a lot of the money created through derivatives made its way into mortgages and real estate … adding LOTS of air to the jumphouse.

Back then, real estate investors were riding high … just like today’s stock market investors.

And those who only measured the air pressure in the jumphouse … ignoring other gauges … didn’t see the circuits over-heating … until the system failed.

Then the air abruptly stopped, the inflated markets quickly deflated, and the equity-building party turned into a balance-sheet-destroying disaster.

And it happened FAST.

Which bring us to today …

The Atlanta Fed recently raised their GDP forecast for the booming U.S. economy.

Stock indexes are at all-time highs.  Unemployment is low.  The new Fed chair says, “The economy is strong.”

Some say these are the effects of tax cuts and a big spending bill.

Makes sense … because when you measure productivity by spending, when you spend, the numbers move.  Spending, or “fiscal stimulus” is an easy way to goose the economy.

But some are concerned this is a temporary flash fed by debt and deficits.

Others say it’s fiscal stimulus done right … kindling a permanent fire of economic growth and activity.

Could be.  After all, Trump’s a real estate guy, so he understands using debt to build or acquire long-term productive assets.

Real estate investors know better than most that not all debt and spending are the same.

Of course, government, geo-politics, and a national economy are a much different game than New York City real estate development.

And there are certainly some cracks showing in all these strong economic numbers …

A strong U.S. dollar is giving emerging markets fits.  Home buyingbuildingappreciation, and mortgages are all slowing.

We’re not here to prognosticate about what might happen.  Lots of smart people are already doing that, with a wide variety of opinions.

We just keep listening.

Our point today is … there’s a lag between cause and effect smart investors are wise to consider.

When lots of things are changing very fast, as they are right now, some are tempted to sit out and see what happens.  Probably not smart.

After all, the air in the jumphouse could last a while.  No one likes to miss out on all the fun.

But others put on sunglasses, toss the umbrella, and go out and dance in the sunshine … without watching the horizon.  Also not smart.

Dark clouds could be forming in the distance which might quickly turn sunshine into storm.

The best investors we’ve met take a balanced approach … staying alert and nimble while enjoying the sunshine, but not getting lost in the lag.

Changes in economic seasons aren’t the problem.  It’s not seeing them coming and being properly prepared.

Until next time … good investing!


More From The Real Estate Guys™…

The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training, and resources to help real estate investors succeed.

This is getting old … and that’s good

Even though there are many interesting economic developments to talk about, we’re going to focus on an oldie, but a goodie … senior housing.

National Real Estate Investor just released their latest Seniors Housing Market Study and the headline hints that opportunity in the niche might be … growing old …

“High construction levels are tempering some of the enthusiasm in the seniors housing sector.” 

Although cautionary, it’s hardly doom and gloom compared to this cheery report from Attom Data Solutions …

Foreclosure Starts Increase in 44 Percent of U.S. Markets in July 2018

Or this one …

One in 10 U.S. Properties Seriously Underwater in Q2 2018

Or this one …

U.S. Median Home Price Appreciation Decelerates in Q2 2018 to Slowest Pace in Two Years

BUT, as we’re fond of pointing out, the flip-side of problems are opportunities.

And because real estate is NOT an asset class any more than “Earth” is an asset class, there are lots of niches, sub-niches, and micro-trends to dig into to find deals.

Besides, every time some casual observer scans a scary headline and walks away, it leaves even more opportunity unclaimed for those willing to look a little closer.

So let’s see what we can glean from these articles …

First, the “underwater” report illustrates the point that real estate can’t be an asset class because even a sector as broad as “housing” behaves very differently in different places …

“… the gap between home equity haves and have-nots persists because home price appreciation is certainly not uniform across local markets or even within local markets.”

As long as this is true, there will always be “haves” and “have-nots.”  We’re not sure about you, but we’d prefer to be “haves.”  So that means picking the RIGHT markets.

Of course, “markets” aren’t just geographic.

A market can be a product type … single-family housing, multi-family, mobile homes, student housing, senior housing, medical, office, retail, resort, and on and on.

A market can also be a price-point.  “Low-income” is different than “work-force,” which is different than “executive,” which is different than “luxury.”

Consider this quote from the “appreciation” report …

“Price-per-square foot appreciation accelerates for homes selling above $1 million.

You get the idea.  As you continue to parse real estate into geographic, demographic, and economic niches, sub-niches and localities, you can uncover hidden opportunity.

This kind of analysis is the “work smarter, not harder” alternative to simply looking at hundreds of properties along with all the other deal-hunters.

So with that backdrop, let’s go back to our lead headline about what’s happening in seniors housing …

“Seniors housing has carved out a larger place in investors’ commercial real estate portfolios due to the compelling demographics and a track record as a steady performer in both up and down market cycles.”

BUT …

“… survey indicates a note of caution creeping in because of how much new supply is coming into the market.” 

First, “hint of caution” isn’t “OMG, the sky is falling” … so that’s good.

We’ll just hit one more quote, then look at how to go sub-niche as a way to mitigate the potential negative consequences of “too much supply.”

“…respondents in this year’s survey remain confident in seniors housing’s stable fundamentals.  A majority are optimistic that both occupancies and rents will continue to increase …”

So clearly, there’s a LOT to like about the senior housing space.

Of course, it’s this very bullishness which attracts new development and increased supply.

HOWEVER, there’s an angle to consider … and the hint is that this article is written to, and about, commercial … largely institutional … investors.

To them, senior housing means big buildings … like those featured in this report from the American Seniors Housing Association.

And remember, when big institutional money is looking for yield, they need big institutional properties to buy or build.

But as our good friend Gene Guarino tells us, there’s a sub-niche of the senior housing niche that’s too small for the big players, but plenty big for Main Street real estate investors …

Residential assisted living homes.

RALs are where you take an existing McMansion in a residential neighborhood, make some modifications, bring in a specialized manager,  and house a small group (8-16) of seniors who need assistance with their daily care.

But unlike a regular boarding house, these things cash-flow like CRAZY.

We won’t get into the mechanics of all that now.  You can learn more here.

Our point is this is RALs are a sub-niche where you can ride a demographic wave (boomers’ parents … and eventually boomers themselves), an economic niche (million-dollar plus homes), a hot niche (seniors housing, and especially assisted living) …

… and avoid the challenge of excessive inventory created by big institutional money.

Think about it …

There’s not yet a practical way for institutional money to come in and build large supplies of residential assisted living facilities.  They can only build “big box” facilities.

If and when they overbuild, it will mean the big box facilities will be forced to lower prices to attract residents from each other.

BUT, the big box operator has a BIG, all-or-nothing facility, meaning it can’t easily reduce room count to match demand. They either own and operate the entire big building or they don’t.  There’s no in between.

So over-supply means they’ll need to cut SERVICES in an attempt to preserve profitability.

Contrast this to a RESIDENTIAL operator …

Let’s say you have six of these houses in an area where the big boxes overbuild.

Will YOU feel the price pressure?  Sure.  At least a little bit.

BUT … remember, the senior resident who ends up living in a big box is often a different customer than the one in a residential assisted living home.

Many will pay a premium to live in a home rather than an institution.

So right out of the gate, your sub-niche of the senior demographic is arguably less price-sensitive, and your residential home is a very different value proposition.

But let’s say you do get squeezed and lose a few residents.  If you can’t replace them with profitable residents, you can always sell one of your six homes … into the single-family home market.

After all, it’s not like you’ve got a 125-bed single-purpose property.  In other words, you have a Plan B exit strategy that feeds into a different niche …. home-owners.

It’s MUCH easier for you to navigate the ramifications of an over-build … so you can ride the hot wave with less risk.

Even better, if the big box operators’ profit margins get squeezed, don’t be surprised if they take notice of your high profit margins and make you an offer.

We could go on, but you get the idea.  There are always niches and sub-niches when you’re willing to dig a little deeper.

So when you read headlines about macro-trends, keep in mind opportunity is often micro … and often requires more thought.

In this case, the cautionary headline about over-building serves as an example of how to ride a macro-trend, while avoiding dangers created when big money overcrowds a space.

Until next time … good investing!


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