You know it’s been a hell of a year in terms of market volatility right? Now, in cryptocurrency, we expect that. It is a speculative asset class with binary outcomes. That’s why we only invest money in money that we can lose. In 2018, we definitely lost it (who knows about 2019).
But the equity markets are supposed to be where you put your retirement money! Whats up with the volatility? December has been the worst month in the stock market since 2008 and could very well be the worst December since 1932 during the Great Depression.
Why? Because the fed raised rates by one quarter of one percent? Because there is a government shut down over a border wall? Why do these seemingly unrelated circumstances affect your publicly traded equities?
The answer…your wealth in the stock market is not real. When people get nervous and there is a sell off in the market, your wealth vanishes. Investing in the stock market is not conservative as conventional financial wisdom has led you to believe. It gives you exposure to systemic risk that you cannot control.
Now I know some of you skeptics out there will say yeah Buck the real estate market is not an uncorrelated asset either. That’s absolutely true but here is the difference.
You see, the money I have tied up in real estate is real. How do I know that? Well, I can see, touch, and feel an apartment building. And people have to live somewhere so they keep paying if they need a roof over their head. People sell stocks so they can pay their rent.
As for the value of the building. Maybe it will go down in value for a period of time but if I’m making money from the asset now, why do I even care? I’ll just cash flow for a few years and when the value goes back up, maybe I’ll sell (or maybe not).
These are not new concepts for this show but worth repeating because I am sensing panic out there with stock market investors and I am getting a lot of questions about where to invest or where to hold cash.
Rather than be foolish and give you financial advice, let me point out that my own strategy continues to be to buy moderately leveraged real estate with value add opportunities in high growth markets (Dallas, Houston, Phoenix, Atlanta). If you are an accredited investor and you want to know exactly what I’m up to, join investor club ASAP and you can decide if you want to do the same.
As for where to keep cash, I’ll say it again. There is only one vehicle that I know that continued to provide solid positive compounding growth and liquidity through the Civil War, the Great Depression, and the Great Recession. It’s called Wealth Formula Banking and, in my opinion, this is the best risk adjusted long term investment ever.
If you are tired of feeling queasy not knowing which way the market is turning, it may be time to really take a look at this option.
I think we are in for some serious volatility in the next year. That said, I do not believe that we are headed for another 2008 right now. The biggest problem we have right now is that rates are normalizing (although mortgage rates remain low) and there is a tremendous amount of political uncertainty. The markets hate uncertainty.
Sitting on cash in an almost certain inflationary environment may not be in your best interests either. That guarantees you lose money as inflation exceeds the nominal interest you are earning at the bank.
Markets go up and down even though in good times we never seem to remember that. It doesn’t mean we freeze. It means we make decisions based on what is in front of us. In this week’s episode of Ask Buck, we touch on these topics and more.
Start out the year with some Wealth Formula Wisdom. Don’t miss this episode.
Buck: Welcome back to the show everyone. This is the Happy New Year episode of Wealth Formula Podcast and we’re going to pick up where we left off last time. I am back here again with Madalyn aka Joanie. Madalyn, how are you?
Madalyn: Good, how are you?
Buck: Good. And Phil Chan also in the house. Phil is of course my media director, Madalyn is my assistant and they are helping me. We had a bunch of questions. We started doing these Ask Buck answers last week and we realized the show is going to run way too long so to keep the party rolling, pull up you know your eggnog or whatever your drink of choice is and let’s continue. We still have like a bunch of questions to get through. So Madalyn why don’t you start with the first one?
Madalyn: All right we have Matney who says, Hi Buck. One thing it would be great to hear is how you diligence a new investment, what is your thought process, how do you vet the information etc. I think a lot of guys get into the accredited world and then have so many options available to them but don’t know how to weed out the losers from the winners. Vetting a pro-forma and making sure the numbers make sense seems like only one piece of the puzzle. You seem to have a great knack for it. Would be great to hear your thoughts. Thanks.
Buck: Yeah great question, Matney. In fact, you know that’s exactly what I talk about all the time. So as far as how do you weed through all these things you’re getting in your email box, what I would do is look at the email and see if you know the person you’re getting it from, if you don’t just delete it, and I think that’s a good way to start, there’s a phenomena going on right now I think that’s a little tricky and that is that everybody and their mother is all of the sudden raising capital and I think it’s good to a certain extent because I think it it’s making it so it’s not just of just a few. But I worry frankly that I think that there is particularly because anybody who bought real estate in the last ten years since 2009 has only seen good days and so there are groups out there of people who have full-time jobs who are there working 40/50 hours a week at the regular job and then all sudden they are taking down you know 20 million 30 million dollar assets with investor money and a lot of times the investors are not even accredited so it worries me, and frankly it does worry me. I think that these kinds of situations have not been stress-tested so it’s a great question bottom line. So as to how I vet deals, well I don’t vet deals. What I do is I vet people, right? I vet groups, I vet operators, and for those of you who know my multifamily group that I work with, you know a lot is Western Wealth Capital. I talked to them for a year and talked to their investors and I went in to meet them myself and I demanded a track record and I walked properties with them, I did all of that and until I really felt good about the group. Now understand that the moral of the story here is that a pro-forma is meaningless unless you know who it’s coming from, right? That is critically important. Anyone can make a nice glossy looking offering memorandum, put on some numbers on there and have you believe them. The numbers might even make sense to you, but the Devil’s in the details, right? The Devil’s in the details. You may have a plan, you may be told that there’s a plan and it may make sense, but you have to make sure that you believe that the team itself can pull off what they have on their offering memorandum. So you know here’s a great example. So you know I’ve mentioned before I am also a big fan of Kenny McElroy and Kenny is a great, he has tremendous integrity, a guy I really trust and who I invest with myself. Sometimes people joke about how Ken McIlroy’s offering memorandums are so simplistic looking. Well he doesn’t need to blow you away with glossy stuff, right? He did not have to make things look pretty it’s like putting lipstick on a pig or something. You just know him, you know his track record and what he says, comes out of his mouth he believes it, and if it doesn’t happen, it’s not because he was lying to you, because usually it does happen, it happens because of something unexpected. So the importance of know, like, and trust is so critical I cannot even tell you. So the bottom line is, the way I do it is usually if somebody is approaching me, it’s not gonna work, okay? So usually what’s happening is I’m finding out through the grapevine about operators that are performing and I’m finding out from other investors or investor groups, then I’ll sort of shop the group in other words I’ll call them up as an investor I’ll talk to them etc and find out how they are and and then the process of kind of getting to know them happens and then the verification of all of the the claims and the track record and everything else that’s involved happens and then an investment happens. So again it’s sort of the the opposite of what you might think, right? You might think you’re looking at the deal, no you don’t look at the deal, you look at the people, right? I invest in people, I don’t invest in deals, so hopefully that helps. Next question?
Madalyn: The next one is from Aziz who says, Hello Buck. Please provide the best strategy for using retirement funds to invest in European real estate, especially Portugal.
Buck: Sometimes I just don’t have an answer and I won’t even pretend to on this one, right? Madalyn, what do you think? Do you know how to invest in real estate in Portugal? Come on you listen to this show don’t you? Don’t answer that. Honestly I just don’t know the answer to that, I mean I think if you’re looking at getting into European real estate, it’s an entirely different specialty and it’s something that I don’t know a whole lot about so I’m not gonna pretend to answer that, but thanks for the question. Let’s see Eric Schultz.
Madalyn: Hi Buck. What do you see is the best place to park cash reserves heading into 2019? Assume your Wealth Formula Banking policy has already been maxed out for the year.
Buck: Yeah good question again, I can’t, I’m not going to give you financial advice, but here is some considerations that you may think about. One is of course, you know my friend you mentioned Wealth Formula Banking which is going to be my first choice on that for a variety of reasons, WealthFormulaBanking.com check that out if you don’t know what I’m talking about. But I like AHP servicing. Listen I am NOT and I’ll say it again, I’m not a partner, I wish I was, I wish I was a partner of AHP servicing and I was getting you know paid by them or something like that, but they are a sponsor of the show but I’ve been investing with AHP and Jorge for a very, very long time. AHP servicing is nice because not only is it ten percent returns on these it’s non-performing debt fund, but the biggest thing I think that makes them very different from everyone else in the space is liquidity, right? So you can park money there and I think they’re asking for about thirty days typically, it has never taken me more than a few days to get money out of AHP personally, but that’s another consideration. Another one I thought was interesting, I might have mentioned this last show is depending on how long you’re talking about holding and you’re worried about inflation, I’m not sure so sure about physical gold because I don’t think it’s going to be easy to get out of and the taxes you pay on any capital gains is onerous, but if you’re trying to hold cash, GLD the ETF might be something to consider. I have not ever done this myself, but I had an investor I spoke to who had an interesting idea which was to hold money in a gold ETF and essentially what he’s doing is he’s selling options on this so he’s cash flowing too, so that’s something to think about. I’m not an options expert, it is something that I’ve thought about, we’ve had Andy Tanner on the show which Andy’s the master and I highly, if this is an interesting concept to you, maybe check out Andy Tanner’s stuff, I don’t know what his website is but just Google Andy Tanner and it might make sense to look at it that way as well, but again, for me personally you know cash is Wealth Formula Banking, AHP and plus-or-minus possibly looking into an ETF for GLD which is the gold ETF and consideration only if I can learn how to sell options and not be totally stupid about it so, okay next question.
Madalyn: Our next question is from Alex who says, Good morning Buck. I am a dentist that recently purchased my own practice a year ago which has done much better than I expected. I have not listened to all your podcasts (but a pretty good number) and one thing that I have heard you talk about but never really expand on is you talk about how important growing your business income stream is. I find many people in my profession have high paying jobs that are self-employed positions but the business starts and stops with them and does not create income without their direct input. Again as a dentist this hits really close to home, and my goal for the next year is to make my practice operate more as a business, so any advice on that topic would be excellent (whether its marketing, higher employees, setting up operations systems, etc).
Buck: Yeah great question and in fact you know I’ve had a few different dentists in my investor group who have had big liquidity events, in other words they sold their business or part of their business to private equity and they’ve made a lot of money doing it. So honestly I think this is something that, I mean if I was in your position I would be all over this and trying to figure out how to to do that. So specific, you know it’s obviously a very complex question but I think the biggest problem that most self-employed individuals have, so doctors and you know destists, etc, especially doctors like you know I was in the cosmetic surgery world myself and we still have that cosmetic surgery office in Chicago, that’s where Madalyn is sitting out there, that you know where I was coming from most people who were going into, most cosmetic surgeons, it was all about vanity and they wanted to be famous and they want to have their name up on the door whatever, they wanted to be the next Doctor 90210. I didn’t really care to be famous, that wasn’t my point, I had just gotten done reading Kiyosaki’s Cashflow Quadrant which might be a good start for you if you haven’t read it, and I said I want to build a business. So from day one and that business, my name has never been on the door, still not on the door, and the benefit of that has been that I’ve always approached it as a business, not as a practice. And so now we’ve got two/three different surgeons who work there. I haven’t done cosmetics in probably at least two years, if not three years myself and I think the big thing is, like on how that particular business was built is analogous I think to a dental practice, because a lot of dental practice is not insurance based. So if it’s not insurance-based, it’s really you know building a business like any other business and so when I got in there I was thinking to myself, what I really need to do and what nobody else does or not a lot of people do around me is market. So the first thing I did was find, with some mistakes along the way, I found a very very strong internet marketing person, I found a good person for television and radio so I was on television, radio, I was on the Internet, I still am. I was always focusing on a brand, I was always focusing on a procedure, I was never focusing on myself. I think that, again most people don’t approach these practices, from the first day you ought to be thinking about the exit. How are you gonna leave this practice. And that doesn’t mean you’re going to necessarily. In my case you know with the cosmetic surgery business I did, but you always want to be able to do that if you decide to do that, if it makes sense for you to do that. And the best way to do that is to ask yourself the question of how could I make this business run without me? So if you need more patience, well what do businesses do? You’re in a profession where depending on your market, you could probably be you know doing some radio, you probably could be doing some internet marketing, etc, if you’re not already doing that. Drive in more patients. At some point it may make sense for you to add more staff. And then at one point you’re gonna say to yourself, well gosh I’m making a lot more money than I was, what does this look like if I pull myself out of the picture. And if it looks like the business is still profitable and you could no longer go and do your practice, then somebody’s probably going to want to buy that business. So it sounds very simplistic, but that’s really what it comes down to. You just always have to approach any business, in my opinion, with an eye towards the exit. Whether or not you make that exit, entirely up to you, but you want to be able to do that. The difference is huge because for those people who don’t do that and they finished their careers, they can sell their practices for basically for goodwill, which is not very much. You’re just not going to get that much for your practice. You’re gonna get the cost the equipment maybe, maybe a little bit of goodwill, but if you’re selling a business you’re gonna get a multiple and you might get a multiple seven or eight times or better in terms of the profits and so you could end up with millions and millions of dollars. So I think I don’t know your specific situation but I think it’s smart to think that way and think like any other business, again what does, and a good model might be to look at your most successful cosmetic surgery businesses wherever you are and see what they’re doing, do the same, get on Facebook, get on Google and TV and radio and all that. So hopefully that’s helpful. But again one thing that you need to know, which I think is very, very important and useful is that you have a tremendous opportunity there because private equity loves dental practices. So if you can build something that somebody wants to buy, you could cash out potentially for a lot of money. Okay next question.
Madalyn: The next one is from Stefan who says, What is a current struggle you’re facing right now in your businesses and doing the podcast?
Buck: Good question. I don’t usually talk about my own stuff, but you know, so I have a few different businesses I’ve talked about before. One of the businesses that I had in Chicago unfortunately was unable to survive. So this year is it’s been going out of business. I still have a couple other businesses, one was the cosmetics business we talked about and then another one out there that are thriving, my other businesses that are not medical related are thriving, but you know, it’s always hard when one of your businesses, and this particular business was around for a while, goes out of business. So you know some of the challenges there is there’s some debt to be paid off etc, how to handle that. But again you know that’s one of the one of the important elements of I think in general of this whole concept of multiple streams of income, right? People talk about passive income, well passive income is great, it’s rarely ever completely passive, what I think even more valuable is this concept of multiple streams of income. And so having multiple businesses, multiple assets that are throwing off cash flow, etc, this is all part of it. So that’s that’s one thing. On the podcast side I would say, you know I think that I am inherently impatient and we’ve had tremendous growth over the last year and a half and with this group, with the show, with the show audience, we can get a really high quality talent in terms of people who we’re interviewing, I have one of the best audiences hands down and in the podcast world, and I’m not saying that just to be kissing your butt, but what my point is though that I think I have a very engaged group of individuals and I think you guys are just you are big fans and not fairweather fans, so that’s really helpful. What I would love to do is figure out how to grow that even more and do that quicker. We’re growing constantly, right? Even in the investor group, the accredited investor group, people go to WealthFormula.com if you’re interested in investing in things and you have a certain, if you’re an accredited investor you can join that group and there’s multiple people joining that every week, right? So the group is I think maybe seven eight hundred people, I don’t know it’s a big group of people. We’d love to continue to grow that quicker and for a few reasons obviously it helps us to continue to create better and better shows and content because it allows us to continue to rank on iTunes and have more subscriptions and that leads to better guests, and that leads to even more people listening to the show and that’s all happening organically. My challenge is trying to figure out how can I do it quicker yet maintain the quality that I have right now. And I haven’t figured that out. If you have any good ideas let me know. So anyway question.
Madalyn: The next one is from Vinny who says, Hey Buck.I enjoy your show. There are a LOT of us dentists and physicians who teach and do research in universities around the US and Canada. Some of us are nearing retirement. A decision we are confronted with is this: “Do I take the pension or the lump sum?” The looming pension crisis is a concern. Would like to hear from you on this issue.
Buck: Well I mean again, I can’t give you financial advice. But in any situation, for me personally if somebody was saying do you want to do a pension or a lump sum, I dig the lump sum. Why? For exactly what you just said. I mean man, in a pension, the whole pension world is pretty scary right now. They’re trying to get returns they have to get certain returns in order to continue paying people, but I think what’s gonna happen is some of them are just going to become insolvent and you know they’re just not going to be able to keep the promises that they made so that’s one reason. The second reason is that personally I’d rather be in charge of investing my own money, my own capital because I think I can do better than a big clunky pension, that’s just you know trying to truck away and try to get you four or five percent. So that would be my, the way I did it, but you know of course that’s a completely personal decision and it’s not financial advice but you know bottom line is I don’t trust anything right now that’s going to put my future in somebody else’s hands. So a pension is exactly that. So hopefully that answers it. So the next question I believe is an audio question, we actually have recording here, Brent, so why don’t you go ahead and play that.
Brent: Hi Buck. I keep hearing the weird late in the cycle this even the party is going to come to an end eventually. How are you evaluating real-estate investment opportunities in this environment? Are you stress-testing them in a different way for example running the numbers around a higher cap rate? Part two of that question is again given that we’re late in cycle, to what extent do you recommend keeping cash on the sidelines to take advantages of opportunities that will appear as the cycle ends? Thanks.
Buck: Okay yeah Brent two great questions. Listen I think that in an environment like now, I mean listen, we’re not in 2011, ‘12, ‘13, ‘14, we’re not there anymore, we’re in a situation where asset prices are elevated for sure, we don’t know how long that goes on but we know that they’re elevated. What I will say is this, I think that you have to, in my opinion, be careful of not getting to the point where you’re playing too much defense, you know you have to be careful of that because they think you see people who have literally been listening to the chicken little crowd out there who haven’t invested since 2015 and 16, and if you are in that camp you’re feeling pretty foolish right about now and so I don’t know how long this goes, I really don’t. I think if you look at some of the issues that are out there, I think they are more complicated than they have in the past. Richard Duncan was on this show a couple weeks ago and he was talking about how he didn’t think that the 10-year treasury was gonna move very much even with a bunch of debt and a bunch of stimulation of the economy and that’s pretty unusual. So I think right now, here’s my take: right now the biggest issue to be concerned about is leverage, right? You have to make sure that whatever you’re investing in, you’re paying attention to the way that that leverage, that that’s not over leveraging. Because of that, my focus has been on relatively moderately leveraged real estate with a significant value add component. Why do I care about the value add? Well when you’re adding value, you’re adding equity to a property. And if you’re adding equity to a property, you are then actively deleveraging your property. So in other words you took something, say you bought something at 70 percent loan to value. If you increase a certain amount of equity in the property and it’s worth more, now you might be at sixty percent loan to value. So that’s probably my number one thing because I think at the end of the day, if you believe that real estate in a long run will continue to be an asset that will you know go up in value with inflation and will continue to make money as I do, then I think even in a downturn as long as you’re not over leveraged, you’re basically just riding out a storm and you should be fine. That’s kind of the way I view it. Now as far as you know the pro formas themselves, of course the pro formas obviously they need to take into account you have to look into with some of the groups that I worked with multi-family, what we’re doing right now is we’re looking at rent increases and doing about half of the rent increases as the comps are showing on pro formas. We’re modeling in increased rates. But what’s interesting about modeling in increased rates, and I know this is something that people bring up a lot, is that the actual mortgage rates have not gone up that much because they are not based on just the Fed rate, it’s ten year Treasury which is really dictating that. The other thing is that typically those mortgage rates are going to increase with inflation, right? That’s the reason they’re increasing in the first place. And if that occurs, then rents increase as well. So I think that the idea of not investing in real estate because of potential increases in mortgage rates is probably a little bit something I think is not something that you need to worry about as much because inherently increasing mortgage rates are gonna reflect increasing rents. So yeah so we talked about conservative rent increases. And then finally I’d say evaluate your downside. What is your worst case scenario? What are the loan covenants? We talked about, in 2008 we’ve talked about this before, even Robert Kiyosaki was still telling me about this in one of his buildings that literally it was a building that he was cash flowing on and he got a call from the banker saying that they wanted a capital injection, it was a capital call. How could you have an investment that is cash flowing and you’re getting a capital call? Simple: loan covenants. So if you say you have a loan covenant that’s 80 percent loan to value, meaning you can borrow eighty percent, you have to bring 20 percent of the equity, but we’re going to appraise this thing every eighteen months or something like that and we’re gonna make sure that you are not over leveraged. Well what if the value of that property goes down ten percent? Now if the value goes down ten percent, you are now in violation of your loan covenants so you either cough up money or you give that building to the bank, right? So those are the kinds of things that happen in 2008. So again that goes back to my concern about not over leveraging. Don’t over leverage. Right now is the time to not over leverage. So you take moderate leverage, maybe you take 70% LTV, seventy, seventy five percent at the most and then you began deleveraging with value add as soon as possible. And listen, here’s the thing, again if you believe in real estate and multifamily real estate as I do, eventually you’re going to come out okay if you don’t overextend yourself with leverage. A few weeks ago or months ago I don’t remember but Grant Cardone was on the show and he took it to another level. He was literally talking about he’s okay with overpaying for properties, so he’s saying I’m gonna overpay for properties and I’m going to like only leverage them like he wants high quality properties and he’s willing to overpay and to compensate for that he’s only gonna do maybe 60 percent loan to value, right? That is sort of an extreme, but you know it’s worked for him, the idea in that situation is you’re not really looking at much in the way of of cash flow or returns in the near term but in the long term he’s looking at significant equity. So hopefully that sort of addresses your question. I think there’s a part two to that question and that part two was about keeping cash in the sidelines, right Madalyn? And do I think it’s a good idea to keep cash on the sidelines. Yeah so a couple things. I always think it’s important to have some liquidity available and it’s a mistake I’ve made in the past which you know I hopefully won’t ever do again. The best way to do that in my view again I’m just gonna say it over and over as Wealth Formula Banking, but also there’s some other liquid funds out there. Your savings account is not ideal. Why? Because your savings account is gonna pay you less than inflation so it’s the investment where you are guaranteed to lose money, right? And real money, not like the value of your money is going down in that bank account because it’s not keeping up with inflation. Now let me just let me just add to that though. I think that the mistake a lot of people have been making and frankly I think I got it wrong too even a couple years ago when I was saying I was listening to everybody else saying that the sky is falling and you know I froze up and stopped investing and I really regret that because I bought a couple of properties around that time right before that time that ended up being huge, hugely profitable. So the bottom line is what I would say is yes I think liquidity is important, I’m not giving you financial advice, I’m keeping liquidity around but not because I’m necessarily anticipating blood in the street, I’m gonna continue to invest, have a certain amount of liquidity available at all times you know vis a vie some of these smarter ways of keeping liquidity whether that’s Wealth Formula Banking or AHP servicing or whatever and then if there is blood in the street or there’s opportunities then you have you know money to put in that as well. But I think that you know completely sitting on cash right now that’s not something that I think makes a lot of sense either because the truth of the matter is you know we may even if we have some recessionary activity this year I mean you heard the guys at ITR Economics on a month or two ago, we’ve been following, these guys think the next decade is going to be the roaring 20s, right? So again you know don’t try to predict the future. Just look at your downside, be smart about it and you know be like water. Well anyway this has been a marathon of questions. We’ve been answering these since Christmas, but hopefully you’ve enjoyed it and after we come back we’ll wrap it up with a few final comments.